Important Information regarding NEW MORTGAGE RULES
The federal government has announced sweeping changes aimed at ensuring Canadians aren’t taking on bigger mortgages than they can afford in an era of historically low interest rates.
The changes are also meant to address concerns related to foreign buyers who buy and flip Canadian homes.
Below is a breakdown of the three major changes Finance Minister Bill Morneau announced Monday.
- All new “insured” mortgages, regardless of the size of the down payment will be subject to a stress test which essentially is this: The home buyer would need to qualify for a loan at the negotiated rate in the mortgage contract, but also at the Bank of Canada’s five-year fixed posted mortgage rate, which is an average of the posted rates of the big six banks in Canada. This rate is usually higher than what buyers can negotiate. As of Sept. 28, the posted rate was 4.64 per cent. Other aspects of the stress test require that the home buyer will be spending no more than 39 per cent of income on home-carrying costs like mortgage payments, heat and taxes. Another measure called total debt service includes all other debt payments and the TDS ratio must not exceed 44 per cent.
- As of Nov. 30, the government will impose new restrictions on when it will provide insurance for low-ratio mortgages. The new rules restrict insurance for these types of mortgages based on new criteria, including that the amortization period must be 25 years or less, the purchase price is less than $1-million, the buyer has a credit score of 600 or more and the property will be owner-occupied.
- New reporting rules for the “principal residence” capital gains exemption. Currently, any financial gain from selling your principal residence is tax-free and does not have to be reported as income. As of this tax year, the capital gains tax is still waived, but the sale of the primary residence must be reported at tax time to the Canada Revenue Agency. Everyone who sells their principal residence will have a new obligation to report the sale to the CRA, however the change is aimed at preventing foreign buyers who buy and sell homes from claiming a principal residence tax exemption for which they are not entitled.
Mortgage insurance protects the lender and investor – not the homeowner – from losses related to borrower default and foreclosure. The two main insurers are CMHC which is a Crown Corporation of the Government of Canada and Genworth which is a private insurance company.
The principal residence is the home that you physically occupied and personally used the most during the tax year.