New mortgage rules announced in October by the Federal Government are making it harder for some condo buyers to afford their new home.
The rule changes impact anyone taking out an insured mortgage. If you’re out shopping for a condo right now, especially if you’re a first time homebuyer, how much you can borrow is going to be reduced. Here’s what you need to know.
As of October 17th insured mortgages must pass a “stress test,” in order to prove borrowers can make their payments even if rates were to rise. Lenders have to make sure the borrower qualifies at the Bank of Canada posted fixed rate. This rate is almost always higher than the banks posted rates. According to the Department of Finance, to qualify for mortgage insurance, a homebuyer must have a GDS* ratio no greater than 39 per cent and a TDS* ratio no greater than 44 per cent. Qualifying using this test proves homebuyers have a buffer and would be able to continue servicing their debts even in a higher interest rate environment, or if faced with a reduction in household income.
Insured mortgages will also be subject to stricter terms, even those that are not high ratio. As of November 30th, insured mortgages must only be for the purpose of purchasing a property that the borrower will live in. The loan has to be amortized to a maximum of 25 years and the purchase price cannot be more than one million dollars. Credit scores will also play a role; anyone with a score less than 600 will no longer qualify for insured mortgage.
The tighter terms and the stress test means new homebuyers seeking an insured mortgage will qualify for a smaller mortgage. Therefore, many may have to lower their expectation of the kind of condo they have thought of buying. This can mean less square footage, fewer amenities or a location further away, all in order to find a home that fits within your borrowing limits.
Along with creating new rules to keep Canadians from borrowing outside of their limits, the Government also wants to “improve tax fairness.” When you sell your primary residence it’s not subject to capital gains taxation. Starting now the sale of any property will have to be reported to the Canada Revenue Agency during tax time. This means anyone who owes capital gains tax will be immediately asked to pay it. This targets anyone selling a home that was not their primary residence.
Banks sharing the risk
Currently all insured mortgages are backstopped by the taxpayer. The government wants lenders to share the risk of mortgages defaulting. They are starting the consultation process that could result in banks having to pay a deductible on defaulted mortgages they approved. Banks say this will lead to higher rates and smaller lenders criticize that this will squeeze them out of the market all together.
First time homebuyers could be the biggest losers with these new rules. Generally speaking the amount you can afford to borrow will drop by as much as 25 per cent.
It will mean they have to save more of a down payment to buy their first home or lower their expectation of the kind of home they are looking for.
*DEFINITION OF TERMS:
Gross Debt Service (GDS) ratio — the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income
Total Debt Service* (TDS) ratio — the carrying costs of the home and all other debt payments relative to the homebuyer’s income.
RUBINA AHMED-HAQ is the Finance Editor for HPG. You can read her musings in Condo Life and Active Life. She’s also the Family Finance Advisor for PC Financial. She regularly contributes on TV and radio including CBC Radio, CBC News Network and Global News Toronto. Follow her @alwaysavemoney