Home Buying Rules Tightened
Home Buying Rules are Tightened
The federal government recently announced new rules that are targeted at reducing risks in the housing market by limiting foreign money into real estate and ensuring that borrowers take on mortgages they can afford. Years of low interest rates and shifting attitudes towards debt and indebtedness have had an impact upon the housing market with house prices rising significantly in some markets. The measures outlined below are designed to reinforce the Canadian housing finance system, to protect the long term financial security of borrowers and to improve tax fairness for Canadian homeowners.
1. New qualifying terms for Insured Mortgages.
As of October 17, 2016 ALL insured mortgages will be required to undergo stringent stress testing by lenders. Lenders require a mortgage to be insured when the borrowers down payment is less than 20% of the purchase price or the appraised value of the home. Under the new rules, insured mortgages with a fixed term of 5 years or longer will be required to qualify at the 5 year benchmark rate of 4.64% even though their contract rate is significantly lower. This measure is aimed at ensuring that homeowners can meet their debt obligations should interest rates begin to rise. Up to now, only mortgages with variable interest rates or fixed interest rates with terms less than 5 years were required to meet this rule.
Homeowners with an existing insured mortgage or those renewing existing insured mortgages will not affected by this measure and individuals who have already applied for mortgage insurance are also exempt from the new rules.
This will have a significant impact on buyers. For example, a hypothetical borrower with an $80,000 annual income and a 5% down payment could qualify today for a house worth $500,000 at a 5 year fixed rate of 2.49%. But under the new rules, the same buyer could only qualify to buy a home worth $385,000. The lender will still be willing to offer the lower rate but they are tested as though the mortgage rate is twice as high as it really is.
2. New Qualifying Rules for Low Ratio Mortgages or Mortgages Backed by Portfolio Insurance
On November 30, 2016, new rules will also come into effect for mortgages with 20% or MORE down which are backed by government insurance and sold as Mortgage Backed Securities or through the Canadian Mortgage Bond. Mortgages that lenders now insure (at their cost) using portfolio insurance and other discretionary low loan-to-value ratio mortgage insurance, must meet the same criteria applicable to high-ratio insured mortgages. These measures which include refinances, renewals, amortizations over 25 years, rental or investment properties and mortgages over $1 million that can no longer be insured and securitized will severely affect our non-bank lenders and reduce and possibly remove any competiveness in the market as the big banks are not required to adopt these changes at this point. This will quite possibly drive up rates for consumers and cut competition in the lending sector. An existing mortgage holder who qualified in the past and is now facing mortgage renewal will be forced to renew with existing lender at the rate offered or move to a bank where competitiveness may no longer exist.
3. Improving Tax Fairness and Closing Loopholes
Proposed changes to the tax rules would ensure that the principal residence capital gains exemption is not abused. The federal government will be tightening the loop holes in the tax laws that allow non-residents to buy a home in Canada, and then get a tax exemption to avoid paying capital gains when they sell the home by claiming it as their principal residence. An individual who was not a resident in Canada in the year the individual acquired a residence will not be able to claim the exemption for that year.
Canadian home sales fall further in July
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales declined further in July 2017. Highlights:
National home sales fell 2.1% from June to July.
Actual (not seasonally adjusted) activity in July stood 11.9% below last Julys level.
The number of newly listed homes edged back by 1.8% from June to July.
The MLS Home Price Index (HPI) was up 12.9% year-over-year (y-o-y) in July 2017.
The national average sale price edged down by 0.3% y-o-y in July.
Julys interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer, said CREA President Andrew Peck. Even so, sales activity continued to soften in the Greater Golden Horseshoe region. Meanwhile, sales and prices in Montreal continue to strengthen. All real estate is local, and REALTORS remain your best source for information about sales and listings where you live or might like to.
July marked the smallest monthly decline in Greater Golden Horseshoe home sales since Ontarios Fair Housing Plan was announced in April, said Gregory Klump, CREAs Chief Economist. This suggests sales may be starting to bottom out amid stabilizing housing market sentiment. Time will tell whether thats indeed the case once the transitory boost by buyers with pre-approved mortgages fades.
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Decline in single-family component moderated by gain in multi-family dwellings
Canadian municipalities issued $8.1 billion worth of building permits in June, up 2.5% from May and the second highest value on record. Higher construction intentions for multi-family dwellings and commercial buildings were mainly responsible for the national increase. All building components reported gains in June, except for single-family dwellings.
The value of residential building permits fell 0.9% in June to $5.0 billion, the fourth decrease in five months. The decline was mainly the result of lower construction intentions in four provinces, notably Ontario.
In June, the value of permits for single-family dwellings decreased 12.5% to $2.4 billion. Seven provinces registered declines, with Ontario being the main contributor to the decrease.
Conversely, construction intentions for multi-family dwellings rose 12.5% in June to $2.7 billion, marking a third consecutive monthly increase. Seven provinces registered gains, led by Ontario and British Columbia.
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