On Monday October 3rd, 2016 Ottawa announced new mortgage rules to curb risks in the housing market, unveiling new measures to crack down on speculation by foreign investors and make it harder for homeowners to acquire mortgage debt.

Finance Minister Bill Morneau announced a series of new mortgage rules , including more stringent “stress testing” for borrowers who take out insured mortgages and rules aimed at mortgages with high down payments.

In an interview , Mr. Morneau said the new measures are aimed at addressing the government’s concerns that extremely low interest rates have encouraged Canadians to overextend themselves financially, posing a risk to both individual homeowners and the broader financial system.

mortgage-reforms

“We are getting at the overall concern around family indebtedness and a sense that we recognize that Canadians are relatively highly indebted,” he said. “We want to ensure that we have measures in place to help them to take on risks that they can afford, especially in the situation where mortgage rates go up or their family income goes down.”

The government also levied taxes to ensure that real estate agents will be paying capital gains tax on the sale of investment properties as they should be. The changes investigation in the Vancouver area that revealed a network of local and foreign buyers flipping homes for profit and avoiding taxes by classifying them as principal residences.

The new mortgage rules will make it mandatory for anyone who claims an exemption on capital gains tax when selling a home to report the sale on their tax returns. Families will be allowed to claim an exemption on only one home a year and the home’s owner must live in the property.

Last December the government announced its first intervention into the housing market , introducing higher down payments for insured mortgages on the portion of a home priced between $500,000 and $1-million. These were primarily targeted towards high priced homes in Vancouver and Toronto. On Monday, Mr. Morneau called the higher down payments “the right measures at the time,” but said that Ottawa saw it had more work to do to tackle risks in the housing market.

Currently all mortgages between one and four years, and variable rate mortgages must qualify using the higher Bank of Canada (BOC) qualifying rate which is currently 4.64%. The BOC rate is currently 2 percentage points over the 5 year discounted rate. Fixed rate mortgages five years or longer currently qualify at their contract rate. Beginning Oct. 17, borrowers who apply for a mortgage five years or longer will be subjected to a more stringent “stress test,” ending a two-tier system for the country’s mortgage market.

The end result is that borrowers will qualify for less mortgage when the new rules take effect. For example a first time home buyer with an annual income of $80,000.00 and no debts buying a home and putting less than 20% down will qualify for a mortgage of just over $570,000.00. After October 17th, the amount they would qualify for would be just over $445,000.00. This assumes a mortgage rate of 2.30% and a mortgage amortized over 25 years.

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