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.
To help make homeownership more affordable for first-time home buyers, Budget 2019 introduces theFirst-Time Home Buyer Incentive.
The Incentive would allow eligible first-time home buyers who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with Canada Mortgage and Housing Corporation (CMHC).
It is expected that approximately 100,000 first-time home buyers would be able to benefit from the Incentive over the next three years.
Since no ongoing payments would be required with the Incentive, Canadian families would have lower monthly mortgage payments. For example, if a borrower purchases a new $400,000 home with a 5 per cent down payment and a 10 per cent CMHC shared equity mortgage ($40,000), the borrowers total mortgage size would be reduced from $380,000 to $340,000, reducing the borrowers monthly mortgage costs by as much as $228 per month. Terms and conditions for the First-Time Home Buyer Incentive would be released by CMHC.
CMHC would offer qualified first-time home buyers a 10 per cent shared equity mortgage for a newly constructed home or a 5 per cent shared equity mortgage for an existing home. This larger shared equity mortgage for newly constructed homes could help encourage the home construction needed to address some of the housing supply shortages in Canada, particularly in our largest cities.
The First-Time Home Buyer Incentive would include eligibility criteria to ensure that the program helps those with legitimate needs while ensuring that participants are able to afford the homes they purchase. The Incentive would be available to first-time home buyers with household incomes under $120,000 per year. At the same time, participants insured mortgage and the Incentive amount cannot be greater than four times the participants annual household incomes.
Budget 2019 also proposes to increase the Home Buyers Plan withdrawal limit from $25,000 to $35,000, providing first-time home buyers with greater access to their Registered Retirement Savings Plan savings to buy a home.
Bank of Canada maintains overnight rate target at 1 ¾ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 per cent.
Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR). While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.
Many central banks have acknowledged the building headwinds to growth, and financial conditions have eased as a result. Meanwhile, progress in US-China trade talks and policy stimulus in China have improved market sentiment and contributed to firmer commodity prices.
For Canada, the Bank was projecting a temporary slowdown in late 2018 and early 2019, mainly because of last years drop in oil prices. The Bank had forecast weak exports and investment in the energy sector and a decline in household spending in oil-producing provinces. However, the slowdown in the fourth quarter was sharper and more broadly based. Consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations. After growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.
Core inflation measures remain close to 2 per cent. CPI inflation eased to 1.4 per cent in January, largely because of lower gasoline prices. The Bank expects CPI inflation to be slightly below the 2 per cent target through most of 2019, reflecting the impact of temporary factors, including the drag from lower energy prices and a wider output gap.
Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range. Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.
The next scheduled date for announcing the overnight rate target is April 24, 2019. The next full update of the Banks outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.