On Monday, October 3, 2016, the Canadian Mortgage and Real Estate industry was blindsided by an announcement from Finance Minister, Bill Morneau to slow down the hot real estate market in areas such as Toronto and Vancouver, which will result in making it more difficult for Canadians to qualify for mortgage financing.

Home sales have already shown signs of a slowdown in Vancouver since the BC government announced the Foreign Investment Tax of 15% for any homes purchased by non-residents or non-Canadians living in BC. The demographic that will suffer the most impact from the announcement will be the young Canadian first-home buyers who are already priced out of the market and the Foreign Homebuyers as new Capital Gains Tax will be implemented as well.

All mortgage applications moving forward will undergo qualifying “Stress Tests” whereby affordability ratios will be calculated based on the Bank of Canada Benchmark rate of 4.65% to determine if borrowers will be able to afford their mortgage payments in the event of a rate increase.

The Finance Department announced in their press release, “Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it.” Here is a summary of the new changes effective on October 17, 2016, and how they may affect you:

Tighter Mortgage Insurance Rules for Homebuyers:

1. For homebuyers with less than 20% down payment – currently to qualify for a 5 year fixed rate mortgage, borrowers are qualified based on the fully discounted rate which is currently more than 2% lower than the Bank of Canada benchmark rate. To qualify for mortgage terms of 1 to 4 years or the Variable Rate mortgage, borrowers must use the benchmark rate, currently 4.75% to qualify. Moving forward, all mortgage applications with less than a 20% down payment will require qualification based on the Benchmark rate of 4.75%. An example of what this means, a borrower with an annual income of $100,000 would have qualified for a mortgage of $600,000 based on the old rules, however once the new policy is in effect, the qualified mortgage amount drops down to $450,000, which reduces the affordability by $150,000 (these numbers are approximate only).

2. For home buyers with a 20% down payment or more – should the lender require portfolio insurance on your mortgage on the back end, the above rules will also apply in addition; government mortgage insurance will no longer be available for properties over $1,000,000 and for non-owner occupied properties.

3. Foreign Homebuyers/Owners – Any individual who was not a resident in the year the individual acquired the property, will no longer be able to claim the Capital Gains Tax exemption in the year the property is disposed. Effective immediately, foreign homeowners will no longer be able to benefit from the sale of property without having to pay the Capital Gains Tax, this is a game changer for Foreign Investment in Canada.

4. CRA Requirements – Canada Revenue Agency will require all taxpayers to report the sale of property or properties where the Capital Gains Tax exemption is claimed as a principal residence.
Currently, lenders use a Gross Debt Service Ratio (GDS)/ Total Debt Service Ratio (TDS) calculation to qualify for mortgage financing. The new calculation will be based on the Bank of Canada benchmark rate, currently 4.75% and is as follows:

• GDS which accounts for a maximum 39% of annual income allocated towards Principal and Interest Payment, Property Taxes, Strata Fees and Heating Costs.
• TDS which accounts for a maximum 44% of annual income allocated towards Principal and Interest Payment, Property Taxes, Strata Fees, Heating Costs, and other monthly debts.
  There will be no exceptions made to the above ratio calculations. I personally feel that the above changes once implemented will make housing less attainable for Canadians and will drastically reduce the demand for housing which could result in a decline in house values.

Not good news for home owners and especially First-Time Home Buyers who will be hit hard once affordability and qualification become tougher. New mortgage rules will come into effect on October 17, 2016, if you would like to discuss your situation and need any clarification, please contact me at 604-614-6899 or by email at Ajit(AT)LoanBox.ca.