I am sure by now most of you have heard that there are a number of changes coming to mortgage industry and I would like to give you a quick overview. Over the last few years, there have been a few minor changes. The new changes, however, will certainly have a much stronger impact on the real estate market. The changes are aimed to achieve different goals. The major areas of concerns were: household debt levels in Canada, foreign speculative buyers, soaring real estate prices and federal government’s (tax-payers’) risk exposure in current environment. Here is the information we have at this point on some of the major changes to be implemented:
This will probably have the biggest impact on real estate market. Here is what it is and how it affects us. Every time we apply for a mortgage we go through an income qualification process. This process uses the ratio of household income in relation to debt. The debt portion of this ratio uses expenses associated with owning a property. Until now, for qualification purposes, the mortgage expense on 5-year, fixed mortgages used a rate that was offered to you in the contract. This rate is in the range of 2.29% to 2.79%. Variable rate mortgages, as well as mortgages on shorter terms used a Bank of Canada posted rate for the same qualification. As of September 28, 2016, the Bank of Canada posted rate was 4.64%. The new change will require qualification for all mortgages with less than 20% down payment to be done using the higher of, Bank of Canada posted rate or the contract rate. In most cases the Bank of Canada posted rate of 4.64% will be the higher of the two.
Scenario 1 – A household with an annual income of $60,000, no other debt, 5% down payment, an estimated property tax of 1% and a 25-year amortization.
Now (prior to change) will qualify for approximately $370,000 property value.
As of October 17th, 2016, the same household would only qualify for about $300,000 property value.
Or, the same household would need approximately $73,000 annual income to qualify for the original $370,000
Scenario 2 – A household with an annual income of $100,000, no other debt, 5% down payment and estimated property tax of 1%.
Now (prior to change) will qualify for approximately $630,000 property value.
As of October 17th, 2016, the same household would only qualify for about $510,000 property value.
Or, the same household would need approximately $125,000 annual income to qualify for the original $630,000
The effect of this particular change will likely be the most noticeable. The above scenarios indicate that, for many buyers, the overall buying power for real estate will likely decrease by approximately 20%. Unfortunately, I do not have the resources to tell you how much of an effect that will have on real estate prices but, based on the simple observation above, we could see a decrease in real estate prices by as much as 10%.
Primary Residence Tax Exemption
This change is mostly targeted at foreign buyers but it will likely have an effect on people owning more than one property. Up until now, anyone who sold their principal residence in Canada did not have to report that sale to the CRA, or the profit earned on that sale, because this profit would qualify for a tax exemption. From now on, the federal government will require sale of every property to be reported to CRA. This means that now, CRA will be closer monitoring such transactions and people that file taxes in Canada will have to prove that the property qualifies for principal residence exemption. There are other loopholes that foreign investors can use so this change will not likely have as big of an overall impact as intended but people owning more than one property will have to be extra cautious.
Mortgage Insurance Changes
This measure is introduced to reduce risk to tax payers associated specifically with mortgaging properties of higher value ($1,000,000 and over). As of November 30th, the government will impose extra restrictions on when insurance will be provided for low-ratio mortgages (down payment higher than 20%). Here are the four new restrictions:
- Property must be owner-occupied,
- Amortization period must be 25 years or less,
- The purchase price has to be $1,000,000 or less, and
- The buyer has to have a credit score of 600 or higher.
Possible Changes to Risk Sharing
This change is also introduced to lower governments exposure to risks associated with possible wide spread defaults on mortgages. Currently, the federal government is responsible for practically 100 percent of insured mortgages, in the event they default. The government will be reviewing the market and possibly implementing measures where some of the risk is taken on by the lenders. With today’s low rates, most of the extra costs associated with mortgages are transferred onto a borrower, us. If the mortgage lenders are forced to take on the added risk, it could potentially lead to higher mortgage rates.
At this point, it is hard to forecast the actual outcome of these regulatory changes and there is no doubt that they will be disruptive in the short term. I am committed to providing my expertise and helping my clients navigate through these changes. If you have any questions, please fee free to contact me to review your situation.