In 2016, the federal government of Canada introduced several new rules for home financing. As these new mortgage changes were brought without consulting the finance sector, there is still a lot of confusion about them.
In this episode of Real Estate 101: Sales Representative Joe Terceira and Mortgage Broker Tracey Brock explain these new mortgage changes, what they are, why are they introduced and what do they mean for the home owners and lenders.
What are the New Mortgage Changes?
The federal government has introduced a number new mortgage changes. The main three include:
- Introducing a mortgage stress test to all insured mortgages
- Restricting low ratio mortgages
- Reporting the sale of your primary residence to the CRA
What does Introducing a Mortgage Stress Mean?
Since October last year, a new stress test is applied to all new insured mortgages. This includes mortgages where the buyer has over 20% down payment. The purpose of this stress test is to make sure the buyer would still be able to afford the mortgage, even if the interest rates increase.
In this case, the buyer will need to qualify for a five-year fixed posted mortgage rate with the Bank of Canada, in addition to qualifying for a loan at the rate he negotiated in the mortgage contract. Currently the posted mortgage rate is 4.64%.
This mortgage will affect buyers with a minimum of 20% down payment, but who are looking for a mortgage that may cause them to overextend themselves. In addition, it also affects lenders who are looking to purchase government-backed insurance for low-ratio mortgages.
What do the New Restrictions on the Low-Ratio Mortgages Bring?
The second among the recent mortgage changes the federal government has come up with has to do with new restrictions on providing insurance for low-ratio mortgages. These restriction include:
- The buyer must have a credit score of 600
- The property must be owner-occupied
- The purchase price has to be below $1 million
- The amortization period cannot exceed 25 years.
This new change should limit the government’s involvement in residential mortgages for properties worth over $1 million.
Why is it Necessary to Report Your Primary Residence Capital Gains?
As of this tax year, the sale of the primary residence is reported to the Canada Revenue Agency (CRA). However, selling the primary residence will still not have to be reported as an income and any financial gains from it is free of tax.
So why was this change introduced? The new rule is most likely an attempt to prevent foreign home buyers to claim a tax exemption on the primary residence when they are not entitled to it. This should in theory prevent foreign investors from falsely claiming this exemption and flipping homes.
What Should the New Home Buyers be doing Based on the These Mortgage Changes?
The important thing for new buyers in regards to the new mortgage changes is to have their approval in place and to keep their expectations in check, according to Tracey.
Speak with professional mortgage brokers about your goals and think about what you can budget monthly. Then worry about the cost of your new home. There are simply too many costs new home buyers can’t anticipate.
Watch this episode to learn more about the recent mortgage changes.
For more information on mortgage financing contact:
Looking to Buy or Sell Real Estate in the GTA?
Joe Terceira / Sales Representative
THE JOE TERCEIRA TEAM
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