The Minister of Finance put his foot down by announcing new mortgage rules effective October 17. Here are the three major changes and how they will impact your mortgage whether you are buying, renewing or refinancing:
1. Qualification Rate
Effective October 17, ALL insured mortgages will qualify based on MQR (mortgage qualification rate) and not actual borrowing rate. Example, you may borrow at 2.39% but you would have to qualify at 4.64%. This will lower your buying power by 20%! Once B20 regulation comes into play, then ALL mortgages (including conventional) will have to qualify at posted rate regardless of term chosen.
- The stress test will give Bank of Canada room to hold or maybe cut the benchmark (prime) rate to stimulate a stagnant economy. GDP numbers have been revised down for the next few years
- Number of co-signed mortgages by parents and gifted downpayments will increase to help their children get into their first home
- I wouldn't be surprised if the mortgage qualification rate (MQR) is cut as sales and price data come in the next few quarters
- First time home buyers on the fringe of qualifying will be pushed into the rental market
- Properties over a million dollars in Toronto will not be impacted
- Real estate investors with quality investment properties will experience higher rental demand as more first time home buyers get pushed out of the market
- Buyers consider properties with in-law suites / finished basement to generate rental income to offset the reduction in qualification
2. No More Insured Mortgages
Effective November 30, lenders will no longer be able to insure:
- Investment properties
- Mortgages of 26-30 years amortization
Commentary: There will be less competition since monoline lenders (lenders who only provide mortgages to Canadians) insure mortgages on the backend. They cover the cost of insurance providing options to homeowners across the country. This will lead to 2 tier pricing: first tier if you are refinancing up to 25 years you will get one price and if you need to go to 30 years you will pay a higher price to consolidate debts or if your cash flow requires a lower monthly payment.
Monoline lenders provide competitive mortgages without astronomical IRD (interest rate differential) penalties and collateral mortgages which banks are known for. This is terrible news for Canadians due to less competition and investment properties mortgages and refinance business will be pushed solely to the big 5 banks.
3. Principal Residence Exemption
Designed to minimize foreign money influence in Toronto & Vancouver, the buyers have to be residents in the year they buy the property to claim principal residence exemption. Effective this tax year, the government will require Canadians to report all house sales and file T2091 . I believe this is a good intention policy but having foreign buyers pay upfront (tax similar to Vancouver) is more effective than having a deferred tax when they sell.