“Will the Market Cool on New Stress Test Rules?”
Did you hear about Monday’s announcement by the feds? Bill Morneau, Federal Finance Minister, has raised a couple eyebrows, including mine. Here’s how things went down.
The government is pretty spooked. The raging price gains in the Toronto and Vancouver real estate markets have struck a worrisome chord. Let me rephrase one part of that sentence. The raging price gains in Toronto and Vancouver’s low-rise markets have struck a worrisome chord among many.
Low-rise refers to detached houses, semi-detached houses and town-homes. This category does not include condominium apartments which, according to the latest stats, have been far more stable in terms of year over year price gains, than their low-rise cousins.
In Toronto, the average percentage increase for a condo in September went up 9.95% compared to the same period last year. If you haven’t already heard, houses in the city saw an eye-popping 21.5% price jump from September of 2015. Let that simmer for a while.
The two cities are leading the pack in what has become the most expensive low-rise housing markets in North America—from the perspective of annual price gains. We did expect some sorta, “we’re doing something about it” type gesture from the federal government. We just didn’t anticipate how aggressive it would be.
Let’s jump into what Monday’s news was really all about.
1. A New Mortgage Rate “Stress Test” for all
Come October 17th, homebuyers, regardless of their down-payment amount, must qualify for an insured mortgage using the Bank of Canada’s benchmark rate.
Let’s say you are getting a 5-year fixed mortgage with an interest rate of 2.44%. Under the new rules, while your actual payments will still be based on 2.44%, lenders must now use a higher interest rate to determine if you qualify.
This higher rate is called the Bank of Canada’s Benchmark rate, which as of this writing, sits at around 4.64%. How does this play out by the numbers? Before the proposed rule changes, first time buyers Michelle and Shawn’s combined income of $120,000 qualified them for a purchase of around $619,000.
Under the new rules, they must now qualify using the higher benchmark rate of 4.64% which shrinks their purchasing power down to around $490,000. Yikes. That’s not a typo.
Prior to the new rules, this stress test was only applied to variable rate mortgage borrowers (considered higher risk), and those applying for fixed terms under 5 years. The new rules will now group everyone in the same basket.
2. New restrictions for low-ratio mortgages
Beginning November 30th, there will be specific criteria for homebuyer applying for a mortgage with a down-payment of less than 20%.
The amortization (period of the loan) must be 25 years or less: Bye-bye 30 year amortization
The purchase price must be less than $1Million
Your credit score has to be 600 or greater
The property has to be owner occupied
3. Capital gains exemptions for primary residences
At present, selling your primary residence doesn’t require you to report the tax free gain to the Canada Revenue Agency. When the coming changes, the sale of your primary residence will remain tax free, but must be reported on your annual tax filing.
I suspect this change is targeting foreign buyers who purchase homes under the guise of acquiring a “primary residence,” flip the property at a tidy profit and avoid paying any capital gains taxes on the sale.
4. Lenders must assume more insurance risk
The government is saying that lenders need to take more responsibility for risk in the market. At current, taxpayers are on the hook for roughly $523 billion for in-force mortgage-insurance that the federal government backs 100% through its national housing agency, CMHC.
If Ottawa moves to further tightens the purse strings, this could translate into higher mortgage rates down the road for consumers. Lenders anticipate that they can no longer rely on the government to cover 100% mortgage defaults.
While taking on some of the responsibility would encourage more prudent and careful mortgage practices, it comes at a cost and those costs would trickle down to mortgage borrowers via higher rates.
If you are looking to purchase or refinance, now is probably not the time to procrastinate. You must act now. Please contact me for all your mortgage and real estate needs ASAP.
