It should come as no surprise that Canada’s major real estate markets have seen a dramatic increase in price point over the past few years. The dramatic increase can’t be attributed to anyone one single cause, but rather a wealth of causes; we’ve seen outside investors swoop in and drastically increase the sales volume in many of our biggest cities, we’ve seen tons of buyers hit a market with all time low inventory levels, ensuing bidding wars that have sky rocketed the average cost of home. Cities like Toronto and Vancouver have been most affected, now carrying the highest average home cost in Canada, by a long shot. The average cost of home in Toronto had increased a whopping 20% in 2016 compared to the previous year, whereas Vancouver saw an even larger increase of 30%. What’s more alarming, however, is that the average cost of home has been accelerating at a rate exceeding that of inflation. This has posed concerns related to our economy.
Dreading a repeat of the major housing crash of 2008, the government released a handful of new initiatives meant to help tame the market.
Stress Test: Possibly the biggest of the new changes: Potential home owners now must pass a stress test designed to predict if they’ll be able to pay off their mortgage in a variety of worst case scenarios, mainly if interest rates were to rise, or if they saw a personal financial hardship. The test will require potential home owners to qualify at the Bank of Canada’s posted rate of 4.64 percent rather than the 2.5 percent that most lenders are offering. So, what does this mean for Canadian buyers? It means they will not be able to afford as much home as they may have thought. In theory, this rule is meant to prevent Canadians from taking on too much debt, and to prevent our economy from entering a financial crisis.
Insurance for Low Ratio Mortgage: On Nov 3rd 2016, the government placed new restrictions on when it will provide insurance for low ratio mortgages. There are now new criteria restricting insurance for low-ratio mortgages, including a requirement that the amortization period must be 25 years or less, the purchase price must be less than $1 million, the buyer must have a credit score of 600 and the property must be owner-occupied.
Minimum Down Payment: Effective February 15th 2016, homes with a purchase price of less then or equal to $500, 000 require a minimum down payment of 5%. For homes with a purchase price greater than $500,000 and less than $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance. For homes with a purchase price of $1 million or more, the minimum down payment is 20%.
Reporting Rules: In addition, there are new reporting rules for the primary residence capital gain exemption: anyone selling their home will now have to report the income to the Canada Revenue Agency; with that said, the income is still tax-free. This is meant to prevent foreign buyers from claiming primary residence tax exemption for which they are not entitled, as there have been many instances of investors doing just that.
Lender Risk Sharing: The government has also launched consultations on lender risk sharing. Prior to this change, the federal government took on all the risks of an insured mortgage in the event of a default. This change now has lenders taking on a portion of that risk. How will this affect the market? Mortgage lenders will now be assuming more risk, which could potentially lead to higher mortgage rates for home buyers in the future, thus minimizing demand.
BC’s First Time Home Owners Grant: Many of the newly implemented rules are making it extremely hard for first time home owners to jump into the market. The BC government has implemented a first-time home owners grant to help. Essentially, the government is issuing interest free loans for those who qualify. The provincial government will match funds of up to $37,500, or up to 5 per cent of the purchase price, with a 25-year loan that is interest-free and payment-free for the first five years.
As you can see, Canadian Mortgage Rules have undergone some massive changes. It’s yet to be seen if these changes will tame the market. On paper, it’s a great start, but time will be the ultimate deciding factor.