Are you a first time home buyer and/or thinking about buying a home with less than 20% down? If so, you may not qualify for as much as you would hope. Here is a quick summary of the new mortgage rules that were implemented this week:
THE MORTGAGE STRESS TEST HAS BEEN EXPANDED TO FIXED AND VARIABLE MORTGAGES
If you are make a down payment of less than 20% of the home’s purchase price you’re seeking a high-ratio mortgage, and you need mortgage insurance. All homebuyers seeking an insured mortgage, will be subject to a mortgage rate stress test beginning October 17. The purpose of the stress test is to assure the lender that the home buyer can still afford the mortgage if interest rates were to rise. The home buyer would need to qualify for a loan at the negotiated rate in the mortgage contract, but also at the Bank of Canada’s five-year fixed posted mortgage rate (which is an average of the posted rates of the big 6 banks in Canada).
What this means to homebuyers: It's going to be more difficult to get approved for your mortgage. Early estimates are showing that 1 out of every 5 first time home buyers will be affected by this change. This means that approximately 20% fewer first time home buyers will be purchasing homes after Oct 17. It can could affect the amount you are pre-approved for upwards of $100,000 less which can greatly impact the type of home you may be thinking of purchasing. If you are preapproved for a mortgage, speak to your broker again because you will likely quality for much less if you were looking to get a high-ratio mortgage.
NEW REPORTING RULES FOR THE PRIMARY RESIDENCE CAPITAL GAINS EXEMPTION
Financial gains from selling your primary residence are tax-free and do not have to be reported as income. As of this tax year, the capital gains tax is still waived, but the sale of the primary residence must be reported at tax time to the Canada Revenue Agency. In a nutshell, if you sold your home this year, you now have an obligation to report it to the CRA.
NEW RESTRICTIONS ON WHEN IT WILL PROVIDE INSURANCE FOR LOW-RATIO MORTGAGES
The new rules restrict insurance for low-ratio mortgages based on new criteria, which include the following:
amortization period must be 25 years or less
the purchase price is less than $1-million
the buyer has a credit score of 600
the property will be owner-occupied
By doing this the government is essentially lowering it's exposure to residential mortgages for properties worth $1-million or more, a category of the market that has increased rapidly in Vancouver and Toronto.
CONSULTATION PROCESS ON "LENDER RISK SHARING" HAS BEGUN
The government basically wants banks to have more skin in the game when it comes to insured mortgages. It's possible that Canadians will face higher mortgage rates as banks pass on higher funding costs.
If you're unsure about buying a home amid all the new changes, give me a call (403.919.9733) and we can discuss some options that would be right for you.