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Changes to the Canadian Housing Rules: How Could They Affect You?

14/10/2016


​On October 3, 2016, the Canadian government announced changes to the housing market. The changes announced are “preventative measures for a healthy, competitive and stable housing market,” tweeted Canada’s Finance Minister, Bill Morneau. While the Canadian government likely is trying to slow down the hot housing markets in Vancouver and Toronto, the changes will also impact many homebuyers across the country. 

One of the announced changes may affect the mortgage amount for which a homebuyer can qualify. In 2010, a change was made which stated that homebuyers using a mortgage term of less than five years would have to qualify for a mortgage using a rate set by the Bank of Canada. This Bank of Canada rate would be higher than the homebuyers’ actual mortgage rate, which meant if interest rates were to go up, it would be likely that the homebuyer would still be able to service their payments. Starting October 17, 2016, this test will be applied to all insured mortgages, including those with terms five years or more. This change will affect more homebuyers than it may initially appear. Homebuyers may assume that they have avoided the required CMHC insurance because their down payment was at least 20% of the purchase price; however, the lender may still be obtaining insurance against the mortgage that the homebuyer is not aware of in order to limit its risk.

In response to this change, some mortgage lenders will use the higher Bank of Canada interest rate, currently 4.24%, to test for qualifying mortgages; this means homebuyers will be limited to a smaller mortgage amount. Other lenders may choose not to insure the mortgage and use other alternatives, although  these lenders will likely push these higher costs onto the borrower. 

In the case where a homeowner sells their home and uses the existing equity to buy another home, the new rules will impact the mortgage availability on the new home. Here is an example of the impact of the new rules, assuming the lender will use the 4.24% to determine all of its mortgages:

First-time home buyer

Annual income $80,000

Current debt $0

Down payment $40,000

Five-year mortgage rate 2.29%

Based on the current rules, the maximum purchase price for a home is $520,000. On October 17, 2016, the maximum purchase price of the home will be $425,000. This is almost a $100,000 difference in the ability to purchase a home.

The implications of this rule change are:

(a) You will be able to afford a lower priced home due to the limit in mortgage eligibility.
(b) You need to take more money out of your corporation or find other ways to fund the shortfall.
(c) The cost of a mortgage will be increased in the form of fees or increased interest rate. 

The second change in rules will come into effect on November 30, 2016. This change will restrict mortgages where the lender wants to insure the mortgage, whether the down payment or equity is 5% or 20%. To qualify for government backed insurance, the purchase price must be less than $1M, the amortization period must be 25 years or less, the buyer will be required to have a credit score of 600 or more and the property must be owner-occupied. Mortgage lenders may not be able to get insurance on loans with higher equities. This change would make lenders having to take on additional risks, which could translate into possible higher mortgage rates for home buyers.

From the two rules changes discussed, those who have purchased a home but have not yet closed on it may find that their lender won’t honour the mortgage terms as agreed upon depending on when the closing date is, in particular those with further closing dates.

The last change is a tax reporting requirement for sales of a principal residence. Previously, the sale of a principal residence is tax-free and did not need to be reported as income. The sale of a principal residence will still be tax-free; however, the sale must be reported to the Canada Revenue Agency (CRA) on the tax return. This will help the government keep track of the principal residence exemption being used in order to catch those who are not eligible for the exemption. This will also require better tracking and disclosure of the purchase and sale of your home and in particular if you have multiple homes that you reside in, such as a cottage. The CRA has been doing more matching of home sales to tax returns and this is a step toward closing discrepancies. MNP’s Derek Innis recently wrote an insightful article discussing the details of this.

If you have any questions regarding these new changes and how they may  impact you, contact your tax professional or Bonnie Tan, CPA, CA, MBA, at 416.515.3847 or [email protected].