Well, when the federal government wants to drop a bomb on the housing market, they go full out. They announced changes to the mortgage rules yesterday and boy are they doozies! I will start with what I see as the most significant change going forward for the Canadian consumer.
As of October 17th, if you choose a 5 year fixed rate which is currently 2.39%, you will be qualified not at the 2.39% rate but at the higher Bank of Canada benchmark rate of 4.64%. This is significant as it reduces your buying power in terms of how much you can purchase. To put this into perspective – as of today with current rules: If your income is $100,000 with excellent credit and no outside debt with a 15% downpayment, you could qualify for a purchase price of $710,000 (estimate on property tax included as well as $100/month for heat). On Oct 17th with the new rules, this drops to $575,000 as a purchase price. This $135,000 difference is substantial!
Another addition to this “stress test” is that you cannot exceed 39% of your income going towards carrying costs of your property. The maximum TDS is 44% which is the percentage of your income going towards the carrying costs of your home and all other debt.
This is the sixth time since 2008 that the federal government has made changes to mortgages in Canada but this round of policy changes are extremely detrimental to the housing market and mortgage lending in Canada. This will not only reduce lending significantly, but it will take away a broad range of mortgage options from the Canadian consumer, reducing choice.
This also affects non-bank lenders that provide great solutions to consumers as many have to back end insure their mortgages, even if clients have 20% as a downpayment or more (This is behind the scenes and the majority of premiums are paid by the lender). Simply put, this will affect low ratio mortgages which would otherwise be qualified on the current rate, 2.39% for a 5 year fixed, as opposed to 4.64%. This leads us to believe that the banks will have an enormous competitive advantage over the non-bank lenders who will be most affected by these changes. Amortizations of 30-35 years for low ratio mortgages may go the way of the dodo but that remains to be seen.
The federal government has also closed the loophole to the capital gains tax exemption for foreign homebuyers. As of Oct 2, 2016, the onus is on the foreign homebuyer to prove that he/she has their property in Canada as their principal residence in order to be exempt from capital gains triggered by the sale of their property.
If you are thinking of refinancing or purchasing, you may want to look into doing this immediately – especially if you need a lower rate to qualify for a mortgage you are requesting and/or need a longer amortization then 25 years. Feel free to reach out to me as I would be happy to help.
Kim Gibbons, Mortgage Superhero ®
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Your Toronto Mortgage Broker