As you may have heard, on October 3, 2016, Finance Minister, Bill Morneau announced changes to the housing industry, which are targeting mortgage debt and foreign buyers. We thought you'd be interested to know what it means for you.
There are 3 basic reforms to be aware of:
- A "stress test" has been implemented to ensure future mortgage affordability for buyers when interest rates go up.
- They have closed the loophole that allowed real estate speculators to avoid paying capital gains on the sale of investment properties when flipping and classifying them as a principal residences.
- They have made changes to portfolio insurance rules. Portfolio insurance is a type of bulk insurance used by lenders to further strengthen the quality of their mortgage portfolio that has more than 20% down payment and did not require mortgage insurance at the time of origin.
All of these changes will affect the mortgage industry in one form or another, but the change that will impact the most buyers in the short term is the implementation of the "Stress Test". Effective October 17, 2016 buyers will now have to qualify for a mortgage using a payment that is higher than they will actually have to pay. This allows a bit of built in security for buyers if rates are higher when they have to renew their mortgage. Essentially, what it means for you today is that you will likely qualify for a mortgage that is about 28% less than what you would have qualified for before the change. For example, a family with gross income of $50,000 per year and no debt other than their mortgage, would have qualified for a purchase price of about $266,000 before the new rules. With the change, that purchase price will be reduced to about $211,000. So, as you can see, this change is affecting your buying power, and applies to all buyers with less than 20% down...not just First Time Home Buyers.
The next change that affects individuals directly is the closing of the loophole regarding exemptions to capital gains taxes for personal residences. In the past, when you sold your principal residence, there was no requirement to pay or capital gains taxes, or report the gain to Revenue Canada. Now, in order to be exempt from the capital gains tax on your principal residence, you will have to complete the proper paperwork with Revenue Canada advising them of the sale, the capital gain, and designation as your principal residence. You will only be allowed to claim an exemption on one home per year and you must have lived in the property.
Finally, the third change noted above, will take effect November 30th, 2016 and will have a big impact on your ability to choose mortgage lenders. Because the majority of lenders using Portfolio Insurance are non-bank lenders, this rule will impact competition in the mortgage lending space. After November 30th, many of our Broker Channel lenders will not be offering mortgage options for refinancing, or purchasing rental properties, properties over $1Million purchase price, and amortizations over 25 years. Without competition, and because of increased risk in their total portfolio, Banks may increase their interest rates for these types of mortgages. Competition in the Mortgage Industry is good for the consumer, so limiting this means this may be the change we like the least.
That's it in a nutshell, but of course it is very complicated, so if you have any questions, you can find us at www.peimortgages.com.