So What’s All The Hype About These New Mortgage Rules?

The leaves are changing colour and the air is finally starting to get colder (I have had to put on a warmer jacket the last few days).  I love fall, even though it is the official end to summer, it is a great time of the year.  Halloween is coming up in just a few days and I can’t wait to dress our little guy up for the first time!  I am 100% sure we will be having much more fun than he will in that costume.

I have been busy with investors and home buyers alike.  With all the media about the new mortgage rules, my phone has been ringing with lots of panic, anxiety and fear of what this means.

Will the housing market crash? – will their be a correction?.  If I am a new home buyer, does this mean I will have trouble qualifying?  As an investor, will it be harder to qualify?  Lots of valid questions – so let me give you my take on it.  Disclaimer: I am not an economist but I do keep a close eye on anything that affects real estate.

The Liberal government made changes to mortgage qualification rules and introduced them quickly on Oct 17, 2016.  The interesting thing is all the media attention this is getting (hence everyone is talking about it!)

The announced changes are aimed at ensuring Canadians aren’t taking on bigger mortgages than they can afford in an era of historically low interest rates.

The changes are also meant to cool off the market and to address concerns related to foreign buyers who buy and flip Canadian homes, especially in Vancouver and Toronto.

I believe that The Bank of Canada should have raised interest rates to cool down the housing market; however they they must have felt that the economy has not fully recovered from 2008/2009.

Also since we are a resource based country; other provinces such as Alberta and Saskatchewan are hurting from the low oil prices.

So what did the Bank of Canada do?  Instead of raising rates, they forced buyers to qualify at a higher rate, sort of like a stress test on their monthly affordability.

You may be thinking, how will this affect the real estate market and more specifically investors?

Most of the changes are geared towards high-ratio mortgages; so in other words a buyer putting less than 20% as a down payment.

This will greatly affect first time home buyers, which is unfortunate.  The dream of owning a home will be crushed for many (unless they move to a more affordable area or buy a lower priced property like a condo).

So ultimately, the luxury market won’t be affected but starter homes likely will.  Investors of single family homes should see this segment slightly cool off (it was on fire anyway!).

With the historically low interest rates, entry into the market has been easier than it ever has been, especially with the ability to put as little as 5% down.

This has led to an imbalance in the market for a few years now.  There have been way too many buyers and not enough sellers to fill the demand causing bidding wars on most of the properties.  It has been a seller’s market completely.  With the current changes – this should definitely begin to change.

So what does that mean for investors?

A large portion of the first time buyer’s will not pass the “stress test” as their affordability has dropped by a dramatic 20%.  This will mean more demand for rental properties as the pool of renters will increase.  More people will be forced to rent until they pass the “stress test”.

So let me recap.  LESS BUYERS + LESS BIDDING WARS = MORE RENTERS & MORE OPPORTUNITIES FOR INVESTORS TO GET DEALS.

It’s hard to say how this will all unfold in the next few months, these are simply my opinions and predictions on what will happen next.  The downside is that we may not see the same type of appreciation figures we have seen over the last few years.  Quite frankly, I am ok with that.  From a long term perspective, it is better this way.

Below is a summary of the four major changes that were announced first week of October 2016.

Change # 1 – Increased stress test for high ratio (insured) 5 year fixed mortgages 

As of Oct. 17, a stress test used for approving high-ratio mortgages will be applied to all new insured mortgages – including those where the buyer has more than 20 per cent for a down payment. The stress test is aimed at assuring the lender that the home buyer could 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 six banks in Canada. This rate is usually higher than what buyers can negotiate. As of Sept. 28, the posted rate was 4.64 per cent.

Usually this ‘stress test’ only applied to variable rates and fixed terms less then 5 years…now 5 year fixed mortgages have to be qualified this way as well if the client is putting less then 20% down.

Change # 2 – As of Nov. 30, the government will impose new restrictions on when it will provide insurance for low-ratio mortgages.

The new rules restrict insurance for these types of mortgages based on new criteria, including that the amortization period must be 25 years or less, the purchase price is less than $1-million, the buyer has a credit score of 600 and the property will be owner-occupied.

This will impact the non-bank ‘AAA’ mortgage lenders but to what extent is unknown.  Likely the non-bank mortgage lenders will fight back as this greatly impacts their business since they bulk-insure (group) all of their low ratio mortgages.

Change # 3 – New reporting rules for the primary residence capital gains exemption

Currently, any financial gain from selling your primary residence is tax-free and does 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.

This means everyone who sells their primary residence will have a new obligation to report the sale to the CRA, however the change is aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax exemption for which they are not entitled.

Change # 4 – The government is launching consultations on lender risk sharing

Currently, the federal government is on the hook to cover the cost of 100 per cent of an insured mortgage in the event of a default. The federal government says this is “unique” internationally and that it will be releasing a public consultation paper shortly on a proposal to have lenders, such as banks, take on some of that risk. The Department of Finance Canada acknowledges this would be “a significant structural change to Canada’s housing finance system.”

This means Mortgage lenders, such as banks, would have to take on added risk. This could potentially lead to higher mortgage rates for home buyers.

I hope this has clarified some of what is happening out there.  Remember, in times of change, there is always opportunity.

So until next time., happy Canadian Real Estate Investing.

Jose Jafferji, REIA

Your Real Estate Investment Advisor