In a move to ensure that Canadians can still afford their mortgage payments in the event interest rates start to rise, Canada’s Department of Finance has announced tighter new rules for borrowers who are applying for a mortgage.
Bill Morneau, Canada’s Minister of Finance, announced the measures Oct. 3. The government says the changes were developed following consultations with housing experts and provincial and municipal leaders across Canada on the state of Canada’s housing market.
In one of those changes, a “stress test” that used to be part of only some mortgage applications will now be required for all applications for insured mortgages.
If you have an existing mortgage or are looking to renew your existing mortgage, the new rules will not affect you. Mortgage loan applications received before Oct. 17 will also not be affected, as long as the mortgage is funded by March 1, 2017.
But if your application for an insured mortgage is received on or after Oct. 17, 2016, you should be aware of the new rules and how they will affect the price of the home you will be approved to buy.
Canadians have enjoyed historically low interest rates for many years. But financial experts have also been cautioning homebuyers to use caution and calculate whether they could comfortably continue with the payments should interest rates rise and their monthly payments rise as a result.
Under the new rules, that test will officially be part of your mortgage application.
In announcing the measures, Bill Morneau said Canada’s low interest rates “have gradually changed the way both borrowers and lenders view debt and indebtedness in this country. As these attitudes and behaviours have changed, some households began carrying high debt loads and pockets of risk have begun to emerge.”
“While the overall Canadian housing market is sound, house prices have risen significantly in some markets, notably Toronto and Vancouver, and some borrowers are taking on high levels of debt,” the Department of Finance says in background notes about the new measures.
“In these circumstances, it is important to ensure that these debt levels are sustainable, that lenders are acting prudently, and that financial stability risks do not arise in the event of increases in interest rates or a housing market downturn.”
Starting Oct. 17, all insured mortgages will have to undergo a “stress test,” to see if the borrower could still make payments if suddenly faced with higher interest rates. This test was already applied to borrowers who wanted an insured mortgage for a high-ratio loan with variable interest rates, and for those who had a fixed-interest rate mortgage for a term of five years or shorter.
The test will now be applied to all borrowers. Specifically, it means that although you can still enjoy current low interest rates lenders are offering on mortgages, you will need to show that you could also qualify at the Bank of Canada’s conventional five-year fixed posted rate. As of this writing, that’s 4.64 %.
How does this affect the home you will be able to buy?
The popular website www.ratehub.ca, which allows buyers to compare mortgage rates offered by different lenders, posted a column about the changes. It included an example of how the new test would work in the case of a household with an annual income of $100,000, with $40,000 saved for a downpayment.
As things stand now, that buyer would qualify for the current best rate of 2.17 per cent. The buyer estimates monthly property taxes of $400 and monthly heating bills of $150. According to ratehub’s mortgage calculator, the buyer would qualify for a home priced at $665,435.
Under the new stress test, while those buyers would still get the same low interest rate, they could only be approved for a home priced at $521, 041.
This is just a hypothetical example, of course, and the good news is that average home prices in Ottawa are considerably lower than they are in Toronto and Vancouver. To put it in perspective, the average sales price of a residential class property sold in Ottawa in September was $383,783, while the average price of a condominium class property the same month was $252,136.
Your financial lender or mortgage broker can help guide you through the new rules.
Other measures announced by Bill Morneau include closing tax loopholes for out-of-country buyers who purchase a residence in Canada. Those who do not live in Canada the year their home is purchased will no longer be able to claim that residence as their principal residence. Those buyers had been able to avoid capital gains taxes by declaring a home as their “principal residence,” even if they do not live in Canada.
If you’re interested in buying or selling property in the Ottawa area, I’d love to meet and chat with you about the market and the services and expertise I offer, with more than 30 years of experience in Ottawa. You can reach me at 613-747-4747.
You can find more details and background on the new mortgage measures on the Department of Finance Canada website.