Mortgage Rules Changes – Oct 3 ’16

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 (with videos).

I’ve summarized the changes below in three categories:

1. Harder to Qualify for a Mortgage
2. Capital Gains Exemption Loophole Closed
3. Portfolio Insured Lenders Crippled

Harder to Qualify for a Mortgage

Starting October 17th, 2016, purchasers with less than 20% down payment will need to qualify at the Canadian Benchmark rate of 4.64%.

Previously, a variable rate or a term of less than 5 years required this benchmark rate, but now all rates (including 5-year fixed rates) require it.

Example:

Prior to Oct 17, 2016, a $60,000 salary would allow for a purchase price of $400,000 with 10% down payment. The mortgage here would be $368,640 (inclusive of a $8,640 CMHC fees).
After Oct 17, 2016, this same $60,000 salary would allow for a purchase price of $325,000 and a CMHC mortgage of around $291,840. This is about a 20% decrease in affordability!

Commentary: The ability for people who have less than 20% to put down is negatively affected and I believe that first time home buyers are affected the most. Due to this new regulation, those affected qualify for purchases of approximately 20% less.

*Additional Important Points

  • The new, tighter rules affect new mortgage insurance applications received on October 17 or later.
  • This does not affect prior committed mortgages.
  • Pre-approvals are affected. A pre-approval is approval from a lender and not the insurer. If you have a pre-approval, it’s extremely important to ask your favourite mortgage professional (PinskyMortgages.ca) if you are affected.
  • Applications received on Oct 3rd and before Oct 17 are not affected, provided that the mortgage is funded by March 1, 2017.
  • Homeowners with existing insured mortgages, or those renewing existing insured mortgages are also not affected.

Capital Gains Exemption Loophole Closed

The government requires property purchasers to be residents in Canada during the time of a purchase in order be exempt from capital gains taxes. 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.

Commentary: 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.

Example:

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 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.

Commentary: 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?

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Thank for reading. For more information, or to see how this affect you and your mortgage financing, please contact Eitan Pinsky at eitan@pinskymortgages.ca or at 778-990-8950.