New changes have been announced in regards to mortgage loans in Canada that were put in place to help residents from taking on more of a mortgage than they can afford. With historically low interest rates, individuals were taking on large mortgages which has made many in government fearful of a real estate bubble. Changes were also put in place by the government in regards to foreign buyers who have purchased Canadian homes to flip for profit. Below is a short explanation of four major changes and how the new laws might be affecting you.
Currently, buyers who have a down payment of 5% or more of the purchase price but under 20% have to have mortgage insurance. The lender is protected by this insurance if the homeowner were to default on the loan. When the buyer has 20% or more for the down payment, the lender can provide a low ratio insurance option that will cover 100% of the loan if a default were to take place.
The federal government of Canada backs mortgage insurance via the Canada Mortgage and Housing Corp. Insurance. This is sold by two private insurers and CMHC.
One change to take place will be the mortgage rate stress test will be expanded to cover all insured mortgages. Last October, a stress test was approved for high ratio mortgages for newly insured mortgages. The goal of the test is to assure the lender that the mortgage can afford the loan even if rates were to rise. The potential homebuyer will have to qualify for the loan at the negotiated rate as well as rates posted at banks of Canada, a five year fixed posted rate. No more than 39% of the income can be spent on the mortgage payments by the purchaser.
This change will affect any home buyer who will put down 20% or more on a mortgage loan and would be stretched thin if the interest rate on the home were to rise. Potential home buyers want to look for the best variable mortgage rates in Ontario in order to be successful with any home purchase.
In November, the government decided to put in place restrictions as to when insurance will be provided for low ratio mortgages. New criteria is to be considered including the amortization period. The period must be 25 years or less with a purchase price under $1 million. The purchaser has to have a credit score of 600 and the property must be occupied by the owner.
Another new change by the Canadian government is new rules for reporting when it comes to primary resident capital gains exemption. In the past, any gain financially due to selling a primary residence was tax free and was not required to be reported as a form of income. However, now, the sale must be reported but the capital gains tax is waived.
Consultations on lender risk sharing has also been launched by the government in an effort to see financial institutions take on some risk when an insured mortgage goes into default. Mortgage lenders would have to take on an added risk that they have never had before as the federal government would like to limit their obligations financially if there were to be widespread mortgage defaults.
The new rules can be confusing, especially to someone who is not well-versed in mortgage terms or definitions. At Mortgage Guys, we can help you understand the new rules and determine if they apply to you and your mortgage needs.