How will the new mortgage rules affect you?
Finance Minister, Bill Morneau, recently introduced new mortgage rules that will inevitably impact how people currently qualify for a mortgage in Canada. Here’s a breakdown from Jeff Mark of Spin Mortgage to help you understand how it may impact you.
Standard Qualifying Rates (Stress Test)
Effective October 17, 2016, all insured mortgages will be qualified at the greater of the contract rate or Bank of Canada posted rate, which is currently 4.64%. Up until the 17th, the current rules apply, which enable borrowers to qualify for substantially more by taking a 5-year fixed rate. Have a read of the old rules, which are about to become obsolete. Spin Mortgage’s affordability calculator will show you the difference, which equates to approximately a 20% reduction in affordability. This will take a good chunk of buyers out of the market, particularly, first-timers.
Standardized Underwriting for Insured and Conventional Loans
Mortgages are either insured (less than 20% down payment) or conventional (more than 20% down payment). Conventional underwriting has always been more lenient; therefore, if you had the extra cash, qualifying exceptions could be granted by banks on a case-by-case basis. This will cease to exist November 30, 2017, at which point it will become generally more difficult to get a mortgage if your application isn’t plain vanilla. Additionally, the maximum amortization will be reduced to 25 years (from 30) for conventional deals that are bulk-insured. Lenders are also starting to restrict/eliminate rentals, self-employed borrowers, and conventional refinances because their securitization options are limited. Inevitably, this will put upward pressure on mortgage rates, which will be felt by all borrowers who are purchasing, refinancing or renewing.
Closure of Tax Loopholes When Selling a Primary Residence
Although it wasn’t clearly stated by Morneau, this is targeted at foreign investors. Essentially, foreign buyers who are not residents at the time when a home is purchased will no longer be able to claim a principal residence exemption to avoid capital gains tax. Frankly, we’re not sure why this was ever allowed in the first place and should have always been reserved for local residents. It appears to be more of a political move than anything else and is insignificant relative to the other changes that directly impact Vancouver locals.
More Risk Sharing Between Insurers and Banks
It’s no secret that the government has been slowly trying to shift more risk back to the banks and away from the tax payers through different capital reserve requirements, securitization rules, etc. Nothing has been set in stone as of yet, but the government is currently consulting “market participants” and the inevitable result will be an increased cost to fund a mortgage, which will put upward pressure on rates as bank’s will aim to maintain their profit spreads.
All in all, the government delivered a massive blow to Canadians seeking out mortgages and the real estate market as a whole. There are severe affordability issues in cities like Vancouver and Toronto for local residents. It’s a regional problem, but the proposed rules are far from regional and will have a greater impact on other cities. It will be interesting to see what happens with general demand over the next couple months, but one thing is for sure - people are going to qualify for less and rates are going to go up.
By Jeff Mark, co-founder of Spin Mortgage, an online Vancouver-based mortgage company servicing British Columbia, Alberta & Ontario.