New rules announced today in Ottawa for mortgage qualifying significantly affects qualifying for home purchases. In short, up until today a borrower could qualify on the best rate they can find, currently as low as 2.19% for a 5 year term. Now the qualifying must be based on the posted 5 year rate which is presently averages 4.64%.
They are also going to crackdown on foreign investors presently using the loophole for tax exemption as principal residence. Will they target speculators and flippers who avoid taxes with this next?
See the Finance Minister's Press Release and the story as reported by CBC News below.
It will be interesting to see the impact of these measures on our superheated market. Please post and share your thoughts! We welcome your questions and the opportunity to advise you with your real estate needs. Please contact us today for assistance.
The Neal Estate Team
RE/MAX Alliance Victoria
Minister Morneau Announces Preventative Measures for a Healthy, Competitive and Stable Housing Market
October 3, 2016 – Toronto, Ontario – Department of Finance Canada
Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada's commitment to help the middle class and those working hard to join it. The Government continues to work collaboratively with its municipal and provincial partners to address the concerns of middle class families facing high debt and concerns over housing affordability, and is actively engaged in monitoring and addressing the overall health and stability of the housing market and financial system in Canada.
To that end, Minister of Finance Bill Morneau today announced three measures designed to reinforce the Canadian housing finance system, to help protect the long-term financial security of borrowers and all Canadians, and to improve tax fairness for Canadian homeowners.
Building on measures announced in December 2015, the Government will:
- Bring consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low-ratio insured mortgages, including a mortgage rate stress test;
- Improve tax fairness by closing loopholes surrounding the capital gains tax exemption on the sale of a principal residence; and,
- Consult on how to better protect taxpayers by ensuring that the distribution of risk in the housing finance system is balanced.
These measures follow an in-depth analysis of the housing market conducted by the Department of Finance Canada, in conjunction with various government agencies, including the Office of the Superintendent of Financial Institutions and Canada Mortgage and Housing Corporation, as well as the ongoing collaboration and information sharing done through the working group with provincial and municipal officials.
"Canadians have told us they are concerned about growing household debt and rapidly rising house prices in some of our biggest cities, particularly in markets like Toronto and Vancouver. These concerns have grown over many years, and there are no quick fixes. The federal government plays an important role in ensuring that housing markets are stable and function efficiently. My colleagues and I are committed to continuing to work with provinces and municipalities to address the concerns of middle class families, and to ensure Canada's housing markets and financial system remain strong, stable and resilient well into the future."
-Bill Morneau, Minister of Finance
Ottawa tightens mortgage requirements and targets foreign money
Finance Minister Bill Morneau announces new rules today in Toronto
By Pete Evans CBC News Posted: Oct 03, 2016 9:52 AM ET Last Updated: Oct 03, 2016 1:35 PM ET
Finance Minister Bill Morneau announces new rules on foreign ownership of Canadian homes in Toronto on Monday. (Adrian Wyld/Canadian Press)
Ottawa has announced new rules aimed at limiting foreign money into Canadian real estate and ensuring that borrowers take on mortgages they can afford.
"Overall, I believe the housing market is sound, but as minister of finance, I want to make sure we are proactive in assessing and addressing the factors that could lead to excess risk," Finance Minister Bill Morneau said in making the announcement Monday in Toronto.
- Reality check: Can a foreign buyer tax cool the housing market without hurting it?
They include a move to close a loophole in the tax laws that allows non-residents to buy homes in Canada, and then get a tax exemption to avoid paying capital gains when they sell the home by claiming it as a principal residence.
Morneau takes measures to cool Vancouver and Toronto housing markets
Starting now, "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," Morneau said.
Canadians who were legitimate residents at both the time of purchase and time of sale will still be able to take advantage of the principal residence tax exemption, Ottawa says.
Toronto real estate lawyer Bob Aaron says the move is a reasonable step to prevent tax leakage.
"There's a lot of people who are declaring their homes as principal residences when they're not," he said in an interview. "I think it's more of cracking down on the existing law rather than plugging a loophole."
In addition to cracking down on tax leakage by foreign money, another change is that from now on, all insured mortgages must undergo a "stress test" that ensures a borrower's ability to make their mortgage payments at a higher interest rate.
Effectively, that means borrowers will be tested against their ability to pay their mortgage if actual rates were as high as the big bank's five-year posted mortgage rates, which the Bank of Canada says currently average 4.64 per cent.
That requirement was already in place for many borrowers, including so-called "high-ratio" mortgages for people with small down payments, and borrowers who borrowed money on terms of less than five years.
But from now on, any insured mortgages will be tested against that higher bar. Anyone who already has a mortgage, or who has already applied for mortgage insurance, is exempt from the new rules, which will formally kick in on Oct. 17.
That could have a big impact on buyers.
According to interest rate-comparing website RateHub, a hypothetical borrower with $100,000 in annual income and $40,000 to put down on a house today could qualify for a house worth $665,435 with a mortgage at 2.17 per cent, which three lenders are currently offering, according to the site.
But under the new rules, that same buyer could only qualify to buy a home for $505,762, or 24 per cent less than before the rules kick in. The lender is still willing to offer that lower rate, but the borrower would no longer be allowed to get it under the stricter rules, because his or her finances would be tested as though the mortgage rate is more than twice as high as it is in reality.
- Realtor group lobbies against foreign buyer tax for GTA market
- Canadian house prices still rising, but at a slower pace, CREA says
That's why BMO economist Sal Guatieri thinks the new stress test is the more significant change of those announced Monday.
"This measure will make it harder for buyers to qualify for a loan, especially in high-priced regions," he said.
"This means that many potential buyers won't qualify for an insured mortgage, which requires the total carrying costs of a home... to consume no more than 39 per cent of gross family income," Guatieri said.
"The measures announced today should help to reduce the risk of a housing market correction in Vancouver and Toronto and a broader retrenchment in Canadian household spending arising from elevated debts."
The issue of foreign money's impact on Canadian housing has come under intense scrutiny in recent months as housing prices have been increased at double-digit annual paces in the two large markets: Toronto and Vancouver.
This summer, Vancouver slapped a 15 per cent surtax on foreign buyers in an attempt to cool runaway price inflation.
CIBC said it expects that Toronto will have "no choice" but to do the same at some point.
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