Understanding the New Mortgage Rules

If you have heard about the changes just announced in an attempt to improve the stability of the Canadian home market you could be left confused or worried about what it will mean for you, but here we will break it down.

The “Stress” Test

Effective October 17th, 2016, all insured homebuyers must qualify for mortgage insurance at an interest rate either the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year posted rate currently 4.64%. This requirement is already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.

Qualifying for a mortgage by applying the typically higher Bank of Canada posted rate when calculating a borrower’s GDS (Gross Debit Service) and TDS (Total Debit Service) ratios serves as a “stress test” for homebuyers, providing new homebuyers a buffer to be able to afford their debts even in a higher interest rate environment, or if there is a reduction in the household income.

Low-Ratio Insurance Eligibility

Effective November 30, 2016 low ratio mortgages, with a loan to value of 80% or less, that lenders insure must meet the following new criteria including a maximum amortization of 25 years or less, a maximum property value of $1,000,000, and the property must be owner occupied.

Income Tax Changes

The current exemption for homeowners profiting from the sale of their principal residence provides a significant income tax benefit. The exemption is intended to be available only to Canadian residents and trusts. Families are only able to designated one property as the family’s principal residence for any given year.

The new measures announced would be better to ensure the principal residence exemption is available only in appropriate cases. Individuals who were not Canadian residents in the year the individual acquired a residence will not qualify to claim the exemption for that year. Trusts will be eligible to designate a property as a principal residence for a tax year that begins after 2016 only if additional criteria are met.

The Canadian Revenue Agency will now require a taxpayer to report the sale of a property for which the principal residence exemption is claimed. Meaning when selling a principal residence, you will be required to provide basic information your tax return for that year in order to claim the exception.

More Changes to Come?

In coming months it was announced that there will be a public consultation to examine the possibility of “lender risk-sharing”. This would introduce a deductible to the mortgage insurance provided by the insurers in the case of mortgage defaults. What does this mean? Mortgage lenders and banks would be subject to added risk. Potentially leading to higher mortgage rates for home buyers.

Feel free to contact us with any questions or concerns regarding these changes and how it will affect you.

New mortgage laws