The Federal Finance Department announced new mortgage rule changes yesterday. These changes are going to significantly affect Canadians.
The largest impact of the changes will be for buyer’s putting a down payment of less than 20% on a fixed –term mortgage lasting 5 years or longer as they will have to qualify at the posted bank rate as opposed to the discounted rate.
For example: if you have an annual income of $80,000 and you have a down payment of $40,000 with no additional debt, at the current 5 year discounted rate of 2.29% (factoring in heat cost and property taxes) your maximum approval would be around $520,000.00. With the new mortgage rules, you would have to qualify these numbers at the current 5 year posted rate of 4.45% which would allow for only a maximum of $425,000.00. This new rule will reduce your purchasing power by about 18 – 20%.
There are also new reporting rules for the primary residence capital gains exemption. Currently, any financial gain from selling your primary residence is tax-free and does not have to be reported as income. However, as of this tax year, the sale of the primary residence must be reported at tax time to the Canada Revenue Agency. Your property, if it is your primary residence and you reside in Canada will still fall under the capital gains exemption.
According to an article in the financial post by Katia Dmitrieva, Bloomberg News, “It’s difficult to predict the exact impact, Aubry said, because homebuyers could react in a variety of ways, from forgoing a home purchase to buying a cheaper home or tapping into savings to qualify under the new rules. The overall long-term impact of the measures will be positive, he said.” In the short time, however, “The measures will erode home sales by 10% and property prices by 5%, Royal Bank of Canada analyst Geoffrey Kwan said, without specifying a timeframe.”
These changes will have consequences for all markets across Canada as the purchasing power of buyers just got a lot smaller.
Financial Post article can be found here: http://business.financialpost.com/personal-finance/mortgages-real-estate/home-sales-in-canada-could-fall-8-on-new-mortgage-rules-finance-department-projects
For more information, the official government announcement can be read here: http://www.fin.gc.ca/n16/data/16-117_2-eng.asp