If you’re a Canuck in the market for a mortgage, some new rule changes may affect your decision making.
The federal government of Canada announced several major changes in mortgage rules that have the potential to put a significant dent in the purchasing power of buyers. The government has indicated that these changes are a response to steep increases in the prices of homes in Vancouver, Toronto, and across the country.
It is now more important than ever to have your financial health and credit score in order before entering the home buying process.
Below is a breakdown of the major changes to Canada’s rule and tips to manage them.
- Stress test for all insured mortgages
This is a major change that affects a lot of folks. In fact, The Canadian Association of Mortgage Professionals indicates that 55% of all homebuyers use insured mortgages. This figure rises to 65% when considering first time buyers.
Prior to this change, only a minority of insured mortgage buyers with less than 20% down were required to pass the stress test. Now, ALL homebuyers seeking an insured mortgage will be subject to a stress test regardless of the down payment. The new rules will reduce the amount that many home buyers can afford.
What exactly is a stress test? This is a “test” that calculates whether the buyer can still afford to make payments if mortgage rates were to rise to the Bank of Canada’s five-year fixed rate, which is currently 4.64%. By definition, “stressed” rates are typically much higher than the rates offered by many lenders. This means higher payments and lower affordability.
Tip: Having a higher income and lower debt obligations will make it more likely to pass this test.
2. Minimum credit score of 600 to qualify for low-ratio mortgage insurance
If you had more than 20% it was previously a relatively simple process to obtain low-ratio mortgage insurance. Starting in November, new criteria for low-ratio insurance will make this process more difficult. To start, you must now have a credit score of 600 or more, in addition to other restrictions limiting the amortization period and purchase price.
Does this rule change apply to you? We recommend you check your credit score to find out.
Tip: You can now check your Equifax credit score for free at Borrowell.com/Free-Credit-Score.
3. New reporting rules for the sale of primary residences
Today, any gain that you incur from selling your home is tax-free and does not need to be reported as income to the Canada Revenue Agency (CRA). However, the federal government is now introducing new rules that state that the sale of a primary residence must be reported to the CRA. This obliges all sellers to report to the CRA. The change is aimed at preventing foreign investors that buy and sell homes from claiming a tax exemption that they are not entitled to.
Tip: Make sure that you report any gain on sale of a residence to the CRA to avoid penalties.
Are you a first time buyer concerned about the new rules? As you can see, the government has announced significant changes aimed at ensuring Canadians do not take bigger mortgages than they can afford.
The best way to manage these changes are to ensure your own financial health is in order before entering the home buying process.
If you are carrying consumer debt like credit card debt, make sure you’re getting the lowest possible interest rate. You can check your rate on a personal loan with Borrowell – it only takes a minute and won’t affect your credit score.