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.
WHAT IS A BRIDGE LOAN AND WHEN WOULD YOU USE IT?
Bridge loans are short-term loans that bridge the gap between two different closing dates. They are most commonly used you sell your home and buy another home with a closing date of the purchase prior to the sale of your existing home. They are also become a popular way to take possession of that new home while its empty for 2 or 3 weeks to allow for renovations. You MUST have a firm sale on your current home to qualify for a Bridge Loan.
In the past most homebuyers would have their selling and buying dates match. It can be stressful as you have to pack your moving truck and unpack it all in less than a day. Somehow everyone manages to get it done but you think back on is as one of the most stressful days in your life!
Buyers today have options and more are taking a relaxed approach as we see Bridge Loans gaining in popularity. The process allows for a more relaxed move over a 3-5 day period or in the case of a renovation perhaps as much as 2 or 3 weeks.
As an example well use a couple that sold their home for $400,000.00 with an existing mortgage of 200,000.00. The sale of the home is closing December 5 and they have purchased another house for $500,000.00 with a new mortgage of 300,000.00 and a closing date of December 1. Heres how the Bridge loan works: The bridge loan will be for 200,000 which is the down payment/equity from existing home. The lender will disburse the new mortgage of 300,000.00 and the bridge financing amount of 200,000.00 (which is your equity amount in the property you have not yet sold) on December 1 so you have the whole amount to complete your purchase. At that time you will be responsible for the 2 mortgages since you have not yet sold your home. On December 5 you will receive the funds from the sale of your home and they will go directly to the lender through your notary/lawyer to pay out your existing mortgage and the bridge loan.
A Bridge Loan will only be offered by the mortgage provider for your new home. You will as stated above be required to confirm the unconditional sale of your existing home. Some lenders will charge a fee (typically 350.00) plus the interest cost but there are lenders who waive the fee and charge the interest cost only. Typical rate for Bridge financing is prime plus 5% which sounds high but based on the above the interest cost for a bridge loan of 200,000.00 for 5 days is under 220.00. The maximum amount of the Bridge Loan will be the amount of your down payment that is coming from the sale of your home. It cannot be greater than the remaining equity in your home that you are selling. The lender will also require your lawyer to provide an undertaking to register a mortgage if the sale of your existing home collapses (not a common occurrence but it can happen).
Depending on your circumstance a Bridge Loan is an available option that can most certainly be utilized at a minimum cost.
Refinancing - Accessing the Equity in Your Home
Do you need access to additional funds? Using the equity in your home can be a cost effective way to access extra funds. Equity is the difference between value of your home and how much you owe the lender. Currently lenders will allow you to borrow up to 80% of the appraised value of your home when you are refinancing. So when you refinance a mortgage on your home, you will pay off the original mortgage and replace it with a new one. There is a good chance the new mortgage will have a lower rate than your existing mortgage. You can then use the extra equity (cash) in your home to cover major purchases such as investments, buying additional property, college tuition, taking a vacation or perhaps buying a new vehicle or boat. Perhaps you need funds to start a business. Or you may wish to use the equity to pay out high-interest debt such as credit card bills, car loans, and unsecured lines of credit. By consolidating high-interest debt into your mortgage at a lower interest rate you can save money and simplify your budget by having just one payment. Again, another reason you may wish to look at refinancing is to simply secure a lower interest rate as mentioned above. Breaking your contract for a lower interest rate can save you money over time. Another option is to establish a home equity line of credit with a refinance. This will allow you to have ongoing access to funds at a lower interest rate because the line of credit is secured by the equity you have built in your home. Lenders will allow you to take up to 65% of your homes value in a line of credit. If you require a refinance to 80% of your home value the remaining 15% can be a fixed or variable rate product.
Keep in mind that you have to qualify for the new mortgage amount and you need to have enough money to cover any related expenses. Every mortgage, including a refinance will have legal fees associated with it. If you are breaking your existing mortgage contract early there will be a prepayment penalty. For fixed rate mortgages it is the greater of three months interest or the interest rate differential (IRD). For variable rate mortgages it is three months interest. If you choose to refinance when your mortgage is available for renewal there would be no penalty.
When you refinance, you may choose to increase your amortization to 25 or 30 years and in some cases 35 years with select lenders. This will reduce your payment and can be financially beneficial if you are in a season of your life where your expenses are higher. Or if you wish to pay off your mortgage sooner you can reduce your amortization or increase your payment frequency. As mortgage professionals we would be happy to assist you with reviewing your financial needs and goals.