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.
CREA Updates Resale Housing Market Forecast
The Canadian Real Estate Association (CREA) has updated its forecast for home sales activity via the Multiple Listing Service (MLS) Systems of Canadian real estate Boards and Associations in 2018 and 2019. Housing market fundamentals remain strong in many parts of the country. Nonetheless, many housing markets continue to struggle in the face of policy headwinds.
The new mortgage stress test announced last October had been expected to cause homebuyers to rush purchases in advance of the new rules coming into effect in January and for the pull-forward of sales activity to result in fewer transactions in the first half of 2018.
Evidence suggests the policy response was stronger than expected, with seasonally adjusted national home sales last December having surged to the highest level ever recorded before dropping sharply in early 2018.
Actual (not seasonally adjusted) national sales figures for March, April and May are typically among the most active months in any given year. Combined sales fell to a nine-year low for the three-month period. The seasonally adjusted trend suggests sales momentum has not yet begun to rally.
Interest rates are widely expected to rise further this year and next. Home sales activity is nonetheless still expected to strengthen modestly in the second half of 2018 as housing market uncertainty diminishes.
Taking these factors into account, the national sales forecast has been revised downward and is now projected to decline by 11% to 459,900 units this year. The decrease almost entirely reflects weaker sales in B.C. and Ontario amid heightened housing market uncertainty, provincial policy measures, high home prices, ongoing supply shortages and this years new mortgage stress test.
Bank of Canada maintains overnight rate target at 1¼ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1 per cent.
Global economic activity remains broadly on track with the Banks April Monetary Policy Report (MPR) forecast. Recent data point to some upside to the outlook for the US economy. At the same time, ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies. Global oil prices have been higher than assumed in April, in part reflecting geopolitical developments.
Inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April, largely because of recent increases in gasoline prices. Core measures of inflation remain near 2 per cent, consistent with an economy operating close to potential. As usual, the Bank will look through the transitory impact of fluctuations in gasoline prices.
In Canada, economic data since the April MPR have, on balance, supported the Banks outlook for growth around 2 per cent in the first half of 2018. Activity in the first quarter appears to have been a little stronger than projected. Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest continued recovery in investment. Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.