Spurred on in part by the National Home Prices Index hitting a record high in August, Bill Morneau, the Minister of Finance, has announced new rules aimed at moderating the Index’s upward climb. The announced changes were accompanied by an empathetic message from Morneau telling Canadians that he understands a home is often their largest and most important asset. Only some of the timelines for implementation were provided but at some point in the future, Canadian’s can expect the following changes:
Better Consistency Across Mortgage Insurance
Mortgage insurance is required when the down payment on a home is less than 20% of the purchase price. In the event a homeowner is unable to service the mortgage, the mortgage insurance will compensate the party holding the loan. Today, in certain situations (namely, variable or fixed rates with less than a 5 year term), when mortgage insurance is issued, a ‘stress-test’ analysis is performed by the lender to model a range of interest rate scenarios. Higher interest rates increase monthly payments and decrease mortgage affordability thereby, fueling the likelihood of default. In an effort to ensure homeowners will be able to afford payments if interest rates rise, under the new proposed rules, all insured mortgages will be ‘stress-tested’ for a range of scenarios to determine affordability.
Impact: Any new mortgages granted after October 17, 2016 will be ‘stress-tested’ under a range of interest rate scenarios to assess the homebuyer’s ability to service the payments. Homeowners will need to qualify under the Bank of Canada’s conventional posted five year rate (currently 4.64%) in addition to the lower discounted rates often provided during face to face meetings.
Increased Reporting and Closing Tax Loopholes on Foreign Ownership
Historically, interaction with the government following the sale of a home was typically limited to updating licence and health card information. Further if the home sold was deemed a ‘Principal Residence’ all gains were tax-free. Today’s proposal requires that all sale transactions, including instances when the Principal Residence Exemption is claimed, be reported to the CRA. In addition, to the extent a non-resident buys and sells a home in the same year, any gain on the sale will be subject to capital gains tax.
Impact: The CRA will be better positioned to take preventative measures while supporting national house prices with access to data around the sale of Canadian’s Principal Residences. Additionally, there is speculation that foreign interest in hot housing markets (e.g. GTA, GVA) could be tempered, as transactions will now be subject to capital gains tax.
Mortgage Underwriter’s Involvement in Mortgage Defaults
Currently mortgage lenders are able to transfer effectively all risk of default to mortgage insurers who in turn, through financial engineering, pass much of this risk on to Canadian taxpayers. In response, a consultation process is being launched to determine how this risk can be better allocated between lenders, insurers and Canadian taxpayers. One of the scenarios being discussed would require lenders assume some liability in the event of default. While it is yet to be seen exactly how the lenders will respond, the increased exposure to default usually translates to increased compensation demands and/or more stringent lending standards. (i.e. higher interest rates).
Impact: Depending on the outcome of the consultation, homebuyers could be faced with increased mortgage interest rates or more applicants being refused mortgages due to their perceived risk.
This move comes in addition to the previously introduced rule requiring increased down payments for purchases of homes over $500,000.