Legislation designed to address Canada’s so-called ‘housing bubble’ has been introduced. We believe you should understand their impact and significance.
Change 1: A mortgage rate stress test to all insured mortgages.
As of October 17, a stress test used for approving high-ratio mortgages will be applied to all new insured mortgages – including those where the buyer has more than 20 per cent for a down payment. The test is aimed at assuring the lender that the homebuyer could still afford the mortgage should interest rates rise.
This measure affects homebuyers who have at least 20 per cent for a down payment but are seeking a mortgage that may stretch them too thin if interest rates were to rise.
Change 2: Restrictions on insurance for low-ratio mortgages
From November 30, the government will impose new restrictions on when it will provide insurance for low-ratio mortgages. The homebuyer would need to qualify for a loan at the negotiated rate in the mortgage contract, but also at the Bank of Canada’s five-year fixed posted mortgage rate. For example, a borrower will now have to be qualified at the 4.5% posted rate even though they may be approved at a different lower rate of 2.25%.
The new rules restrict insurance for these types of mortgages based on new criteria, including that the amortization period must be 25 years or less, the purchase price is less than $1-million, the buyer has a credit score of 600 and the property will be owner-occupied.
Change 3: New rules for the primary residence capital gains exemption
Right now, any financial gain from selling a primary residence is tax-free and does not have to be reported as income. As of this tax year, the capital gains tax is still waived, but the sale of the primary residence must be reported at tax time to the Canada Revenue Agency (CRA).
Everyone who sells a primary residence will have to report the sale to the CRA. The change is aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax exemption for which they are not entitled.
Change 4: Government launching consultations on lender risk sharing
Currently, the federal government is on the hook to cover the cost of 100 per cent of an insured mortgage in the event of a default. The government contends that this is “unique” internationally and that it will be releasing a consultation paper shortly on a proposal to have lenders, such as banks, take on some of that risk.
Please contact Michael Fahy at The Michael Fahy Group for further clarification.