One of our preferred and fantastic Mortgage Brokers Eitan Pinsky wrote a guest article describing the new mortgage rules announced this week.
New Mortgage Rules Affecting Vancouver Home Buyers
On October 3, 2016, the Federal Government tightened mortgage rules and closed a popular tax evasion loophole. The Financial Post has a great article about the changes.
I’ve summarized the changes below in three categories:
- Harder to Qualify for a Mortgage
- Capital Gains Exemption Loophole Closed
- Portfolio Insured Lenders Crippled
Harder to Qualify for a Mortgage
Starting October 17th, 2016, Buyers with less than 20% down payment will need to qualify for a mortgage at the Canadian Benchmark rate, currently at 4.64%. This benchmark rate can change and is available on the Bank of Canada website.
Previously, Buyers looking for a mortgage with a 5-year fixed rate could qualify for a mortgage using the lowest rate available to them, which can increase the amount they can afford. Now, Buyers looking for a mortgage with a 5-year fixed rate (in addition to variable rates or a mortgage term of less than 5 years) need to qualify their affordability with the Benchmark rate, which is often much higher.
Buyers only need to qualify for a mortgage using this rate; when it comes to choosing their mortgage details, they can go with the lowest rate available to them. The reason for this change is to give Buyers financial breathing room in case the interest rate increases, or in case there’s a negative change in their income.
This change reduces the borrowing ability of people who have less than 20% to put down. I believe that first time home buyers will be affected the most here.
Prior to Oct 17, 2016, a $60,000 salary would allow for a purchase of $400,000 with 10% down payment. The mortgage here would be $368,640 (inclusive of CMHC fees).
After Oct 17, 2016, this same $60,000 salary would yield a purchase price of $325,000 and a mortgage of around $291,840. This is about a 20% decrease in affordability!
Capital Gains Exemption Loophole Closed
The Government now requires Buyers to be residents in Canada at the time of a purchase in order be exempt from Capital Gains Taxes (whether it’s your principal residence or not). This means if you buy as a Foreigner but become a Resident during your years of ownership, you will still have to pay capital gains. Furthermore, families will only be able to designate one property as the family’s principal residence for any given year; sales of principal residences will now be reported on income tax returns.
This should have been done a long time ago.
Portfolio Insured Lenders Crippled
Starting Nov 30th, 2016, Monoline lenders who back-end insure their mortgages will be required to have all their mortgages qualify as though borrowers are paying less than 20% down payment.
Before Nov 30th, a family with combined income of $100,000 and with $300,000 down payment would be approved at all lenders for a mortgage loan of approximately $750,000.
After Nov 30th, this same family would be approved at banks and credit unions for $750,000. A lender who bank-end insures their mortgage would only qualify the client for a mortgage of around $540,000.
This has extremely negative affects… The effects aren’t visible at the surface but if you delve deeper, I believe they become much more sinister. This particularly affects many flexible lenders who, for instance, have much lower payment penalties on mortgages. Now, the playing field for conventional mortgages (more than 20% down) will not be equal when it comes to the banks, credit unions and monoline lenders. This will create less choice for borrowers who have 20% or more.
Less choice generally means worse options for consumers. You can bet interest rates and mortgage flexibility will suffer.
Summary: So Why Now?
So why did the government implement rule that seems to hurt consumers? Why now?
I blame house price appreciation, speculation (of all kinds) on the consumer side and the media attention our housing market has received.
The government says it is worried about a Canadian housing crisis. Since these new rules make it more difficult for consumers to obtain mortgages, the government is hoping that this “cools” the housing market.
Further, the government is unhappy with the levels of debt that Canadians are taking on. The qualification rule is meant to curb some of that. For Vancouver and surrounding areas (and maybe Toronto), this new rule will definitely price-out some buyers, especially those with less than 20% down payment.
What I don’t understand is the change to portfolio insured lender mortgages… The only answer I can see is that the government is afraid that even conventional mortgages (mortgages that secure 80% or less of the value of a property) are still a risky asset. If this is the case, why hinder one type of lender and not the others?