Bank of Canada new mortgage rules revealed in order to slow down the Real Estate market. Especially in Canada’s two busiest markets, Toronto and Vancouver.
The reason for the increase in Real Estate prices had NOTHING to do with the qualifying rate. The reason for the increase in prices was simple economics. Very little supply and huge demand.
With over 100,000 people moving into Toronto every year and only 20,000 new units coming onto the market, it is clear we are not approving and building enough single family units. This combined with record low-interest rates has created the high demand.
The main rule change was directed at those applying for mortgages that require high ratio insurance. Which include CMHC, Genworth or Canada Guaranty., or those with less than 20% down payment. The rule the Bank of Canada already made a couple years ago was great. When applying for a mortgage the client must qualify based on the posted rate (4.64%) if you chose anything other than a 5yr fixed rate product (i.e.: variable, 3yr fixed). This would protect clients from taking a variable then being subject to a potential prime rate increase. Thus, they could not longer afford their home. If the client chose a 5yr fixed rate product, the client could qualify based on the discounted 5yr fixed rate (i.e.: 2.39%), which makes perfect sense.
This way the client has a fixed payment for 5yrs and during those 5yrs their payment cannot increase and they pay down the principal by at least 50% with each payment. After 5yrs, that client had paid that much more of their principal off and most likely their income has increased as well. So even if the rates are 1 to 2% higher they are in good shape.
With this new rule, the government has simply eliminated 50% of the first time buyers over night. First time buyers or Millennials make up at least 30% of the buyers since 2009. If we lose 15 to 20% of buyers, this could decrease values by 15 to 20% over night.
Below is a re cap about the recent Mortgage Rule changes Effective Oct 17th, 2016:
- The Mortgage Stress Test: All clients applying for a Mortgage with Less than 20% down and require High ratio mortgage insurance must now qualify based on the 5yr posted rate (4.64%) regardless of the product selected.
What does this mean?
If a client today qualifies for a purchase price of $800,000 (with 10% down). After October 17th, they will now qualify for a purchase price of $650,000 (with 10% down). That is a drop of approximately 18%.
It is still unclear if this will apply to purchases for buyers with 20% or more down as well. If that happens the amount of buyers out of the market would increase.
- Non Canadian resident property owners who sell their property in Canada will now have to pay the capital gains tax. Before Non-residents benefited from the Canadian primary residences capital gains tax exemption. This will end.
The Canada Revenue Agency (CRA) will, for the first time, require all taxpayers to report the sale of a property for which the principal residence exemption is claimed.
- Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low loan-to-value ratio mortgage insurance must meet the eligibility criteria. This previously only applied to high-ratio insured mortgages. New criteria for low-ratio mortgages to be insured will include the following requirements:
A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
- A maximum amortization length of 25 years;
- A maximum purchase price below $1,000,000
- For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;
- A minimum credit score of 600 at the time the loan is approved;
A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved. This is calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate;
- A property that will be owner-occupied.
These tighter mortgage insurance regulations will reduce the supply of mortgages and/or increase their cost to the borrower.
- Consultation on Lender Risk Sharing
The Government announced that it would launch a public consultation process this fall. Seeking information and feedback on how modifying the distribution of risk in the housing finance framework by introducing a modest level of lender risk sharing for government-backed insured mortgages could enhance the current system.
Canada’s system of 100% government-backed mortgage default insurance is unique compared to approaches in other countries.
A lender risk sharing policy would aim to rebalance risk in the housing finance system. Lenders will retain a meaningful, but manageable, level of exposure to mortgage default risk.
Let us know what you think about these changes.
Give us a call or email us at: http://www.mortgages.ca/contact to learn more about the recent Bank of Canada New Mortgage Rules.