Friday, 21 October 2016

So, Those New Mortgage Rules?

Canadian Mortgage Rules

There's been a whole lot of chatter going on about the new mortgage rules instituted here in Canada, and I've finally had a chance to put pen to paper (fingers to keyboard is more accurate I guess) and share my thoughts with you guys. 

The Stress Test
Ok, let's start with the most controversial change. The stress test comes into play for anyone who is getting an insured mortgage. What exactly is an insured mortgage you ask? It is when you are putting down less than 20% down and have to get the extra CMHC insurance. If you are in that boat, you now have to qualify for a much higher interest rate than you will actually be paying on your mortgage. As of right now, you should be able to get an interest rate on your mortgage under 2.5%, but the qualifying rate you have to meet is currently set at 4.64%. Quite the jump hey? The Bank of Canada sets the rate, and they figure it out by taking an average of the posted rates by the top five Canadian banks. So even though you have your lower rate locked in for (most commonly) five years, you'll still have to meet the standards for the higher interest rate, and this means the bank won't lend you as much money. 

But why? Basically, the government is forcing you to be responsible and not overstretch your budget. They don't want you to spend right up to your max and then not be able to afford your mortgage payments if rates skyrocket when you have to renew. Makes sense...sort of. I'm all for not overextending yourself when buying a home and I don't necessarily think that it is your right to own property. However, it is already a huge challenge for the younger generation to get into the housing market and making things harder is not a great option. 

Just over six years ago we bought our first house and looking back now there's a pretty good chance we wouldn't have qualified based on the new standards. At that point, I had only been out of school and working full time for about a year, and the bf was in school and only working part-time...what in the world was the bank thinking giving us hundreds of thousands of dollars? But you know what, we made it work and are in a pretty good position right now. Five years can be a long time, especially when you are at the start of your career. I'm making substantially more now than I was then and the bf is also working full time. Maybe we stretched a little at the beginning, but I never felt like we were uncomfortable or lacking in any way. Yes, it's right to be cautious and you need to go into buying a home with a budget you can live with but factoring in some growth over those five years isn't exactly far fetched. 

This stress test is obviously going to impact first time home buyers the most, as they are more likely to go in with less than 20% down but let's not forget about those people who are looking to upgrade. Say you bought a condo three years ago in Vancouver and are now planning on adding a baby to the mix and need some more expansive digs. Do you have over 20% built up in equity on that condo? If not, and you haven't saved up the balance, you are going to be in the same boat. Vancouver just recently introduced that new 15% tax on foreign buyers and their housing market has taken a hit so this could be more and more common going forward. 

The added pressure on first-time buyers is also going to have an impact on the rental market. Not so much here in Edmonton, but in those hot markets like Vancouver and Toronto occupancy rates are really low, and it's already a challenge to find a decent rental. With more potential home buyers being forced to hold off there will be more people competing for rentals. And what does competition do? Drives up prices. Now you'll have a population are paying higher amounts in rent but also have to try to save more for a down payment. That's a tough situation...



Principal Residence Loophole
When you sell a home that is considered your primary residence you don't have to pay tax on it, thank goodness for that otherwise no one would ever be able to upgrade their home! The rules for this were never governed that tightly, and there was no reporting system for tracking that information. The government is now closing up a big loophole with this exemption, and you will only be able to claim a property as your primary residence if you are a Canadian. Kind of feels like this should go without saying, but now it's official. All of us Canadians will still be able to take advantage of the exemption, but we will now have to report any sale of a principal residence when we file our taxes so the government can track it. There are situations where someone has owned two homes, sold the one they lived in and claimed it as their principal residence (that's fine) and then moved into the second house and later sold that one also as a principal residence. Both sales are ok, but you need to factor in the time you owned the second home and didn't actually live in it. That amount of time would not be exempt and any gain in value during that period would be taxed. This is not really a rule change, but the stricter regulations now make you more accountable. Loophole closed! 

Mortgage Default Insurance
Any mortgage that has a down payment of less than 20% is required to be backed by CMHC, which provides 100% coverage if there is a default on the loan. The full amount of the program is supported by the government (aka your tax dollars), but there is also a mortgage default system that is a little more behind the scenes. Banks will also take out their own default insurance on a loan that does have more than a 20% down payment and a portion of this is often also covered by the government. The whole thing is kind of convoluted, but the proposed changes include some form of risk-sharing (yet to be determined) between the government and the banks. This could be in the shape of a deductible and/or increased rates after a claim. This would be just like your home or car insurance; if you make a claim you likely have to pay a deductible, and your rate will go up in the future. Now as consumers this doesn't affect us, but we can be fairly certain the banks won't just eat these extra costs. Instead, they will pass the cost onto their customers in the form of higher mortgage rates. It sounds like this is still a work in progress, but changes are supposed to be set up in January. 

There we have it, a not so quick review of the new mortgage rules that were introduced. I like the tightened restrictions on foreign buyers and sellers, and I don't even mind the changes the mortgage default insurance, but I think the controversy surrounding the stress test is justified. What do you guys think? Do you support the new rules? 


Canadian Mortgage Rules

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