How added scrutiny and stringency will impact buyers.
The federal government has introduced new mortgage rules in an effort to stabilize the nation’s redhot housing markets — the GTA chief among them — and address concerns about growing household debt levels. Here’s how the regulations will be changing the game for buyers, firsttimers especially.
Stress testing: All purchasers with insured mortgages — those who are putting down less than 20 per cent of their home’s cost up front — must now undergo a rigorous stress test that will assess their ability to repay a loan in the event of an interest rate increase. Buyers must qualify for a loan both at the rate listed in their mortgage contracts, as well as at the Bank of Canada’s five-year fixed posted mortgage rate (an average of the big six banks’ posted rates), which is typically higher than what buyers can negotiate with a lender. Currently, this requirement only applies to a subset of insured mortgages with variable interest rates or fixed interest rates and with terms that are less than five years.
Lending stringency: Mortgage insurance criteria has traditionally been less stringent for loans that represent under 80 per cent of the value of a property than for loans that represent more than 80 per cent of the property’s value. But the government is concerned this is increasing the risk for taxpayers, who ultimately back insured mortgages via Canada Mortgage and Housing Corporation. So new rules taking effect November 30 stipulate that all mortgages that are insured by lenders, including low loan-to-value insured mortgages, must meet the same eligibility criteria as high loan-to-value insured mortgages. Homeowners with existing mortgages or those renewing won’t be affected by these regulations.
Closing loopholes: Alongside the new mortgage rules, the federal government is also taking steps to close a tax loophole that has allowed nonresidents to avoid paying taxes when they sell houses. Under the new regulations, capital gains tax exemptions on the sale of a principal residence will only apply to those who live in Canada the year that the home is purchased. This is designed to curb speculation in Vancouver and Toronto real estate, which some market watchers believe is driven at least in part by overseas investors.
Rental relegation: It’s too soon to assess the impact that the new mortgage rules have had on home sales and overall market dynamics. But by making it tougher for first-time buyers to purchase a property, and therefore forcing tenants to stay put, the mortgage rules are adding more pressure to a GTA rental market that’s already extremely tight. Bidding wars and soaring rents have been the new norm in the rental market amid vacancy rates that are hovering around 1 per cent. There is a limited supply of rentals as it is, and now, with fewer first-timers getting on the property ladder and out of the rental pool, things will only get more severe. On the flip side, however, this presents a golden opportunity for condo investors who are looking for can’t-lose rental-property prospects.