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New Mortgage Rules and How They Affect Home Buyers

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The last two years have seen Canadian real estate prices go through the roof (pun intended), with price increases of 20% to 40% in many of the top markets.

As a result of this overheating, the Office of the Superintendent of Financial Institutions (OSFI) raised the minimum qualifying rate for uninsured mortgages to 5.25%.

What the new rules mean is that buyers who are applying for an uninsured mortgage will need to pass a tougher stress test and show a lender that their income supports a mortgage loan at the offered rate plus 2% or 5.25%, whichever is higher.

Whether this new mortgage rule will help dampen the current frenzy in the real estate markets is unclear. That said, experts are estimating that this move will lower homebuyersโ€™ purchasing power by approximately 4% to 5%.

Other ideas that have been floated for curtailing unsustainable increases in home prices include removing the capital gains exemption from primary residences.

The 2022 federal budget contained several proposals that will impact both first-time home buyers and existing homeowners as the government tries to manage skyrocketing home prices across the country.

New Mortgage Rules 2022-2023

Below are some new proposals for the 2022 Federal Budget:

Budget 2022 has several proposals that will help first-time home buyers. The most popular of these is the Tax-Free Home Savings Account (TFFHSA).

This savings account is like a hybrid between a TFSA and RRSP.

First-time home buyers can save up to $40,000 tax-free and claim their contributions as a deduction on their tax returns.

Investment income earned on the account and withdrawals from the account to fund a home purchase will be tax-free.

The Tax-Free First Home Savings Account is expected to be in place by April 2023.

Secondly, the First-Time Home Buyersโ€™ Tax Credit doubles from $5,000 to $10,000. This increase means first-time home buyers get up to $1,500 back at tax time (a $750 increase).

The First-Time Home Buyer Incentive that allows first-time homebuyers to partner with the government when buying a home is extended until March 31, 2025.

Other changes expected to impact Canadaโ€™s real estate market include:

  • A ban on foreign investment in the residential real estate market for two years.
  • House flippers will be subject to full taxation of profits as business income if a property is sold within 12 months of purchase.
  • Assignment sales will be levied GST/HST.
  • A Home Buyerโ€™s Bill of Rights will help end blind bidding and ensure a legal right to a home inspection. It also aims to make the sale price history for homes more transparent.
  • There are several proposals to make buildings and homes greener and more affordable.
  • A one-time $500 payment to individuals facing housing affordability challenges.

Below are some other mortgage rules that continue to apply in 2023:

1. Homebuyers will need at least a credit score of 680. This is 80 points up from the previous requirement of 600. If a couple is buying a home, one of the applicants must have a credit score of at least 680.

Donโ€™t know what your credit score is? You can check it here for free.

2. The maximum gross debt ratio (GDS) is limited to 35% (down from 39%), and the maximum total debt service ratio (TDS) is now 42% (down from 44%).

Effectively, you must show that a smaller percentage of your income is required to pay off your debts.

3. Borrowed funds will no longer count towards your downpayment or count as equity when considerations are being made for your mortgage default insurance.

While these changes will definitely impact some homebuyers, it is not as bad as it sounds. There were initial fears that the minimum downpayment amount was going to be raised from 5% to 10%.

New Mortgage Rules 2019-2020

The CMHC announced new mortgage rules that took effect on July 1, 2020. These changes tighten CMHC requirements and are aimed at discouraging higher-risk borrowers from taking on a mortgage they canโ€™t afford.

A higher risk borrower is a homebuyer with less than 20% home downpayment.

While these new rules were forecasted to result in house prices declining across the board by 9% to 18%, this did not materialize.

There have been several changes to the mortgage rules in Canada over the last 3 years. The most recent and future changes popped up in the 2019 federal budget i.e. the First Time Home Buyer Incentive, which is aimed at helping first-time homebuyers afford a home in Canadaโ€™s โ€˜hotโ€™ real estate market.

This program would be administered via the Canada Mortgage and Housing Corporation (CMHC) and provide up to $1.25 billion to eligible homebuyers over 3 years. Some of the proposed eligibility requirements for the program are:

  • Households with incomes less than $120,000 can qualify to receive a 5-10% incentive (like an interest-free loan) towards their home purchase.
  • Homebuyers must have a minimum downpayment of at least 5% (insured mortgage).
  • The maximum mortgage value plus CMHC loan is capped at around $560,000.

For example, on a $400,000 resale home, after deducting your 5% down payment ($20,000) and 5% incentive ($20,000), your mortgage amount is reduced to $360,000. This could lower your monthly mortgage bill by $120 from $1,971 to $1,851 (using a 3.49% mortgage rate).

If it is a new home that qualifies for the full 10% incentive (i.e. $40,000), your mortgage amount falls to $340,000, potentially saving you $228 per month (mortgage payment falls from $1,971 to $1,743) or $2,736 per year. These can result in significant savings over time.

Homeowners who take advantage of the plan can repay the loan at any time, and it does not bear interest. The loan (incentive) must be paid up within 25 years or when the house is sold. The First-Time Home Buyer Incentive Program came into effect on September 2, 2019.

In the 2019 budget, there are also plans to increase the RRSP Home Buyersโ€™ Plan from $25,000 to $35,000. This means that couples will now be able to withdraw up to $70,000 from their RRSP to put towards a home purchase tax-free.

Related: A Complete Guide on How To Buy A Home in Canada

Rule Changes in the Canadian Real Estate Market (2016-2018)

In 2017, the Office of the Superintendent of Financial Institutions (OSFI) introduced new mortgage rules that became effective starting January 1, 2018. The new rules require that uninsured mortgages i.e. mortgages where the home buyer has a down payment of 20% or more, now pass the same โ€œstress-testโ€ required for high-ratio or insured mortgages.

The โ€œstress-testโ€ essentially means that all homebuyers must qualify for mortgage loans at the higher of the Bank of Canadaโ€™s five-year benchmark rate (currently 5.14% โ€“ April 1, 2018) or the mortgage rate offered by their lender plus 2% points.

A few changes have been effected in the real estate market over the past year, including:

  • A stress test for all insured mortgages where the home buyer has less than 20% down payment, with new buyers having to qualify for mortgage loans at the Bank of Canadaโ€™s (BoC) benchmark rate โ€“ effective November 2016.
  • Restriction of mortgage insurance to owner-occupied dwellings, shorter maximum amortization period, a purchase price of less than $1 million, and a minimum credit score of 600.
  • A maximum Gross Debt Service ratio of 39% and Total Debt Service ratio of 44% โ€“ calculated using the higher stress-test rates.
  • Increase in the mortgage default insurance premium payable on insured mortgages to as high as 4% โ€“ effective March 2017.
  • The imposition of a 15% foreign buyers tax in British Columbia (August 2016) and Ontario (April 2017), plus other control measures.
  • A similar stress-test for uninsured mortgages where the buyers have 20% or more of their down payment โ€“ starting January 2018.
  • A stress-test will also be conducted when homeowners who are refinancing their mortgage change lenders.
  • Individuals selling real estate in British Columbia are now required to disclose their residency status in Canada for tax purposes. This is to ensure that foreigners or non-tax residents do not avoid paying taxes on capital gains resulting from the sale of property designated as a principal residence โ€“ effective November 27, 2017.
  • A new โ€œspeculation taxโ€ in B.C. that imposes a 0.5% tax (for 2018) on the assessed value of homes that are owned by non-residents (or vacant) was unveiled in the B.C. Budget announced on February 20, 2018. The tax will increase to 2.0% in 2019.
  • The foreign buyersโ€™ tax of 15% that was introduced in British Columbia in 2016 has now been increased to 20% as of February 21, 2018. The area of coverage for the tax has also been widened to include Metro Vancouver plus the Capital Regional District, Fraser Valley, Central Okanagan, and the Nanaimo Regional Districts.

Drivers of these changes have largely been due to the increasing and unsustainable indebtedness of Canadian households, soaring house prices in Ontario and B.C., and the potential risks posed by these issues to the general economy.

What the โ€œstress-testโ€ accomplishes is that it ensures homeowners can afford to pay their mortgage loans even if rates go up. And, speaking of rates going up, the bank of Canada has already raised its key interest rate twice this year (currently at 1%). As the economy continues to improve, more increases are likely, and mortgage rates will follow suit.

Potential Impact of New Rules

Increased regulation in the housing market often has a predictable outcome, at least in the short term.

Generally, itโ€™s likely we will see the following:

  • Increased demand for homes in November and December 2017 as individuals with pre-approved mortgages rush to close.
  • Increased activity in the cheaper homes category and less activity in pricier categories. New homebuyers will qualify for lower mortgage loans when the new rules come into effect.
  • Some slow-down in the growth rate of house prices (year/year), especially in areas like Toronto and Vancouver.
  • Increased patronage of lenders who are not federally regulated, such as credit unions.

Mortgage Professionals Canada (MPC) released a report on December 5, 2017, estimating that the new stress tests that are coming into effect on January 1, 2018, will very likely have a negative effect on the real estate market. Some of their estimates include:

  • Approximately 18% of annual mortgage borrowers (or 100,000 home buyers) will likely fail the new stress tests.
  • 50,000 to 60,000 potential home buyers per year will likely have to settle for a cheaper house that is not necessarily what they would have otherwise opted for.
  • 40,000 to 50,000 prospective home buyers per year will likely be unable to buy a house at all.
  • Between now and the end of 2019, as many as 200,000 homeowners will fail the stress test at the time of their mortgage renewal, causing them to have to look for less competitive mortgage rates.
  • There will likely be an increase in the number of prospective homebuyers who will turn to credit unions (not federally regulated) and mortgage investment corporations (not provincially or federally regulated).

MPC is Canadaโ€™s national mortgage broker industry association and they are definitely fighting for the interest of their group members. Based on some of the stats in the report, some of their estimates are definitely possible. However, no one can say for sure how the real estate market as a whole will react to the new rules.

Mortgage Affordability under the New Rules

An example using Ratehubโ€™s Mortgage Affordability calculator:

Old Rules: Assuming a 20% down payment, 5-year fixed mortgage rates of 2.84%, and a 25-year amortization; a family with an annual income of $100,000 can afford a home worth $693,405.

New Rules: Applying the new โ€œstress-testโ€, the family must qualify for the mortgage using the greater of 4.89% and 4.84% (calculated as 2% + 2.84%). Therefore, with a 20% down payment, a 5-year fixed rate of 4.89%, and a 25-year amortization, the family can now afford a home worth $591,537.

The difference is that under the new rules, the familyโ€™s affordability has dropped by $101,868 (-15%). A bank that was willing to lend them $700,000 before is now only able to loan them approximately $600,000.

Related Posts:

Closing Thoughts

There are going to be different takes on how people see the recent mortgage rules. Many new homebuyers, sellers, and realtors will definitely hate the increased hassle.

In my opinion, itโ€™s a mixed bag โ€“ on one hand, itโ€™s better to have a housing market thatโ€™s healthy and stable; and on the other hand, many young people and new immigrants may have a tougher time becoming homeowners. Overall, if a slower housing market results, it will benefit new home buyers who qualify.

Like I discussed in my article on home affordability, no matter how much the bank is willing to lend you, ensure you only buy a home you can afford.

Buying a house soon and looking for the lowest mortgage rate possible? check out Homewise for the best mortgage rates available in your area!

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Author

Gravatar for Enoch Omololu, MSc (Econ)
Enoch Omololu, MSc (Econ)

Enoch Omololu, personal finance expert, author, and founder of Savvy New Canadians, has written about money matters for over 10 years. Enoch has an MSc (Econ) degree in Finance and Investment Management from the University of Aberdeen Business School and has completed the Canadian Securities Course. His expertise has been highlighted in major publications like Forbes, Globe and Mail, Business Insider, CBC News, Toronto Star, Financial Post, CTV News, TD Direct Investing, Canadian Securities Exchange, and many others. Enoch is passionate about helping others win with their finances and recently created a practical investing course for beginners. You can read his full author bio.

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26 thoughts on “New Mortgage Rules and How They Affect Home Buyers”

  1. Gravatar for Cyndy Callender

    I think one of your ads caused my browser to resize, you may well want to put that on your blacklist.

    • Gravatar for Enoch Omololu

      @Cyndy: Thanks for the heads-up. I will try to figure out what happened. If you also know which ad caused your browser to resize, you can report it by clicking on the “report this ad” text at the bottom. Cheers.

  2. Gravatar for Shirley Kraner

    Appreciating the tenacity you put into your blog and comprehensive information you provide.

  3. Gravatar for CR Sutheralnd

    November 22, 2019

    Rules and regulations old and new do not do enough to protect
    the public from the likes of this;

    Since the following activity effects the Real Estate Industry,
    Lawyers and Mortgage Agents as a whole, the undersigned
    would appreciate your thoughts and/or position on the conduct
    of a Mortgage Agent and her Broker/Employer who appear to be
    operating a Bait & Switch Scam and what, if anything, are the
    industry regulators prepared to do to protect the Public and
    legitimate professionals earning a living in this industry.

    Ex-paralegal Turned Mortgage Agent claims to have obtained
    correspondence course law degree ! Correspondence Administrators
    on record the “…degree is not recognized in Canada”…

    This ex-paralegal becomes self styled Lawyer & Mortgage Agent
    Publicly advertising a “BA” and “LLB” after their name (we all
    know that an LLB degree implies lawyer/legal services, reserved
    for those that have been called to the bar).

    For The Record;
    Ontario Attorney General Doug Downey Refuses To Exercise His
    Mandate as “Guardian of the Public Interest” and Prosecute A
    Phony Lawyer…

    Law society is on record stating “no control over conduct” and
    Confirms Not Licensed Lawyer – Lawyer Insurance ? For the
    Record the LSUC was informed this individuals “Conduct”
    over a year & a half ago May 2018.

    Once the LSUC bowed out The Attorney General “Guardian of
    the Public Interest” was approached to do something about
    this individuals “Conduct”. The Attorney General refuses to
    acknowledge responsibility and/or to protect the public
    from a Bait & Switch Scam.

    Local Conservative MPP Stan Cho, staff member says booked
    up no appointments to discuss this matter in foreseeable future
    (translation Scram kid you bother me).

    Be warned this individual and her employer are operating a
    Very Public “Bait & Switch Scam” The Bait is “I’m a lawyer”
    the Switch is “I’m not a lawyer” just sign here..

    When you think you’re getting a legitimate lawyer to assist
    with a Mortgage Transaction… you’re not… !

    The undersigned looks forward to your reply, thank you
    CR Sutherland

  4. Gravatar for Gelt Financial

    Thankful for sharing this useful post!

  5. Gravatar for KAROLIN

    still not helpful. Lowering the prices of the Ontario houses would be a way better Idea.

  6. Gravatar for jly

    This new rules and regulations will make middle class to buy smaller house at higher mortgage rate, make banks more profitable in mortgage lending and thus more taxes to the government, that is where 40 billion funding for housing development come from. At the end of day, it is the middle-class who pay for the bills.

    • Gravatar for Paul

      No matter what happens, the banks will benefit. Mortgage rates increase, but interest rate on our savings account stay the same. The middle class always bear the brunt.

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