Finance Minister, Bill Morneau recently announced a shakeup of Canada’s mortgage & foreign-ownership rules for real estate taking effect this fall. We are going to break down how this is going to affect Toronto’s real estate market…
Let’s start with the mortgage changes
What does it mean for the average buyer?
Stress tests are expanding to all insured mortgages, not just high-ratio mortgages (less than 20% down payment). This means that borrowers will be tested to see if they could afford their mortgage if interest rates were as high as the Bank of Canada’s 5-year conventional mortgage rate, which is currently 4.64%. It is not mandatory to insure low-ratio mortgages, but some buyers do it for security.
Currently, low-ratio mortgages (at least 20% down) are weighed differently against the buyer’s income, so the buyer is usually approved for a more expensive mortgage in comparison to their income.
This increase in stress tests is meant to ensure the long-term stability of Canada’s housing market by forcing buyers to purchase properties they can comfortably afford. It will most affect first-time buyers, who will either need to save more for their down payment or buy a less expensive property.
Anyone who already has a mortgage, or who has already applied for mortgage insurance, is exempt from the new rules, which come into effect on Oct 17.
What does it mean for the average seller?
Sellers in the entry-level price points will be most affected. Sellers in the million dollar price range may also be affected, as purchasing a property over $1,000,000 requires 20% down, but buyers may want to get their mortgage insured for security, which would reduce their budget.
Buyers who were approved based on the lower interest rate may now only qualify for a lower price point, and buyers who were close to getting into the market may need to wait to save up more. This change will do what is intended- to slightly slow the market down, although the price changes will not be substantial.
Banks taking on more of the lending risks
The federal government is having consultations with banks to see if they will take on added lending risks for insured mortgages, which would lighten the government’s obligations if there were a housing crash (the CMHC). Having the banks pay a deductible if someone defaults on a loan is one suggestion, similar to when an insured car is in a crash. This could higher mortgage rates and make it more difficult for buyers to get approved for mortgages.
If a seller claims a property as his primary residence, he is exempt from paying capital gains tax on the profits when he sells. Foreign-buyers have been claiming multiple properties as their primary residences as a way of avoiding paying capital gains tax. In order to close this loophole, home buyers must now file taxes in Canada, as a resident, the same year they buy a home, before they can later claim the principal residence exemption on any gains.
This most likely won’t make a big change to the market, as most foreign investors will still want to invest their money in markets like Toronto & Vancouver, and have the funds that an added tax won’t deter them. But again, the intention of these regulations is to control the long-term stability of the Canadian market and make it more affordable for Canadian buyers.
A recent Globe & Mail article sums up the new real estate reform well, and includes clips of Bill Moreau’s speech on the changes. VIEW IT HERE.