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New Mortgage Requirements In Canada: A Beginner's FAQ


Patricia Rosen 2016-10-10 15:00:00

Ottawa recently announced new rules surrounding mortgage requirements that will soon go into effect. The new rules are meant to limit foreign money in Canadian real estate, and to help ensure that borrowers don’t take on mortgages bigger than they can handle.

Here is some more information surrounding these new rules:

The Rule, What it Means, and Why

Legislators are trying to close a loophole in tax laws that currently allow non-residents to purchase homes in Canada and then get a tax exemption in order to avoid paying capital gains when the home is sold (flipped).

Canadians who were legal residents of the country both at time of purchase and sale will still be able to claim the principal residence tax exemption.

Currently, buyers with a down payment of between five and 19 percent of the purchase price have to be backed by mortgage insurance, which protects the lender if the home buyer defaults. These loans are called “high ratio” or “high loan-to-value” mortgages. Where a buyer has 20 percent or more as a down payment, either the lender or the borrower can obtain a “low-ratio” insurance that will cover 100 percent of the loan in case of a default.

In Canada, mortgage insurance is backed by the federal government through the Canada Mortgage and Housing Corp. This insurance is offered by CMHC as well as two private insurers.

From now on, all insured mortgages have to go through a “stress test” that will see if a borrower has the ability to make mortgage payments at a higher interest rate. In other words, borrowers will be tested to ensure they will still be able to pay their mortgages if actual interest rates were as high a the big bank’s five-year posted mortgage rates. This part of the requirements has actually been in place for some borrowers already, especially those with small down payments or those who borrowed money on terms shorter than five years.

Anyone who currently has a mortgage is exempt from the new rules which go into effect on October 17, 2016. If you have concerns or questions, you may want to speak with a professional consultant for additional information. Check out WFCU Credit Union for more financial advice and services.

Analysis

Out of all the new rules, the stress test will have the most impact. Under current borrowing rules, a buyer with $100,000 in annual income and $40,000 to put down could qualify for a house worth $665,435 with an interest rate of 2.17 percent. Under the new rules, the same buyer could only qualify for a home for $505,762, 24 percent less than previously. This is because the borrower will be tested as though the mortgage rate is more than two times higher than reality.

The stress test will make it harder for buyers to qualify for a loan; a lot of potential buyers won’t qualify for an insured loan. To get mortgage insurance, the total carrying costs of a home cannot be more than 39 percent of the gross family income.

Another aspect of the stress test requires that the total debt service includes all other debt payments; the TDS ratio cannot exceed 44 percent. Even those who have more than 20 percent for a down payment will have to undergo the stress test.

The government has responded with these rules in response to concerns that if mortgage rates go up, the sharp rise in house prices in cities like Vancouver and Toronto could increase the risk of defaults.

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