As of October 17th, 2016, some Canadians may find it more difficult to obtain a mortgage in order to purchase a home. Below I will discuss the FOUR major changes within the system; who it affects and what this means for the housing market, more specifically, the Mississauga condo market.
Rule 1: Mortgage rate “stress test”
What is a high-ratio mortgage and who does it impact? The Canadian Government now requires those with less than 20% down payment to purchase mortgage default insurance. Therefore, anyone with less than 20% down payment is considered to have a high-ratio mortgage.
All high-ratio insured home buyers must now qualify for mortgage insurance at a rate of 4.64%. Though banks offer interest rates at 2.5%, institutions want to ensure borrowers can still make their monthly payments in the event that rates increase. This new rule came into effect on October 17th, 2016.
The Canadian Government has imposed this new rule in the hope to eliminate the amount of household debt or to prevent it from growing. This rule will affect first time home buyers the most, as they tend to purchase with less than 20% down payment. This will make them re-evaluate as to how much they can afford on a home should they choose not to purchase with the help of their parents. This fundamentally will increase the demand for both purchasing and renting condos (due to lower purchase prices and renting prices of condos in comparison to houses).
Rule 2: Reporting to the CRA
Under the new mortgage rules everyone who sells their home, regardless of it being a principal residence or an investment property, has to claim capital gains to CRA. Simply put, every property sale will need to be stated on your tax return even if you don’t end up owing tax on the sale. The PRE – primary residence exemption, allows any gain on the sale of your home (occupied by you & your family and not used for income purposes) to be a tax-free profit.
Rule 3: Down Payment
Anyone not putting a 20% or more down payment towards the purchase of their home will be affected by this new rule as of November 30th, 2016. Therefore, amortization periods must be 25 years or less; the purchase price of the property must be less than $1 million; the buyer must show a credit score of 600 and the property must be owner-occupied.
Rule 4: Consultations
Lenders are now required to manage a segment of insured mortgage losses as of October 21st, 2016. This will protect borrowers and their long-term financial security. This new change by the government is imposed in the hopes that the market becomes affordable, stable and healthy.
In our next post, we will be discussing how these four major changes to the housing rules will affect the Mississauga condo market.
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