New Mortgage Rules

New Mortgage Rules

November 2016

On October 3 Finance Minister Bill Morneau announced changes to Canada’s mortgage rules. This is the sixth time the federal government has made changes to mortgage requirements since 2008.  Broadly speaking there were three changes: expansion of the “stress test” for borrowers, increasing taxation on foreign buyers and starting a consultation process that might increase the amount of risk that lenders must accept when issuing a mortgage.

The bulk of the media coverage has focused on the expansion of the stress test, and rightfully so, that change will likely have the most immediate impact on the average Canadian. At the moment if your down payment is below 20% of the value of your home, your mortgage needs to be insured. In Canada there are three providers of mortgage insurance: one crown corporation and two private companies. All three receive backing from the federal government. The insurance protects the lender in the event the borrower defaults. The premiums for this insurance coverage are usually worked into your mortgage payment. At the moment if you want an insured mortgage with a short term (less than five years) you have to pass additional tests before qualifying for the mortgage. On October 17, 2016 this stress test will now apply to all insured mortgage, regardless of the term. Effective November 30, 2016 folks with a down payment above 20% that decide to obtain mortgage insurance will also be subject to the stress test.

The stress test forces lenders to qualify borrowers at the Bank of Canada’s posted mortgage rate, which is currently 4.64%. Even though borrowers may pay a lower rate, lenders now need to ensure they will still be able to pay if rates rise.Additional aspects of the stress test considers all debt payments a borrower has to make (not just the mortgage) as well as the carrying costs of the home(heat, taxes etc..) and ensures neither of those amounts are above a certain percentage of income. The likely impact of the stress test will be fewer folks qualifying for mortgages and those that do qualify will likely have smaller mortgages.

The federal government is also changing the filing requirements for the principal residence exemption in an attempt to increase the tax foreign buyers of property have to pay. As well the consultation process has started on sharing lender risk. At the moment the federal government is on the hook if someone with an insured mortgage defaults. The consultation process is set to end February 28, 2017. If the federal government decides to increase the amount of risk lenders must accept when someone with an insured mortgage defaults, it is likely lenders will increase mortgage rates.

The federal government’s goal in making these adjustments is to slowdown Canada’s housing market and reduce the debt burden of the average home owner. It is too early to say whether or not these goals will be achieved, however many Canadians are already feeling the impact.

Clinton Orr B.Comm(hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.

This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.