The New Mortgage Stress Test Rules
The mortgage rules in Canada have changed several times over the last three years. The spring in Canada this year has brought along new mortgage stress test rules along with it. The First Time Home Buyer Incentive, which popped up in 2019, is the most recent change which will help first-time homebuyers.
They would be better able to afford a house in the ‘hot’ real estate market of Canada. Bill Morneau is the Finance Minister. He announced that the benchmark rates determining the minimum rate for qualifying for insured mortgages; that is, the stress test will change beginning April 6, 2020. The stress test would be calculated based on the weekly median five-year fixed insured mortgage rate from mortgage insurance application. This would be along with an extra two percent.
Stress Tests Compel You To Face The Extensive Costs
On looking at it from a financial point of view, the stress test is very similar to how it sounds. It is a procedure of testing how you and your finances would be affected by a sudden period of financial turbulence like being faced by unemployment. When it comes to mortgages, if you go through a financial emergency of any kind or a rise in your interest rates, it is how the potential homeowner copes with the mortgage payment. To put it simply, the stress test compels you to face the high costs of becoming a homeowner.
Therefore, all potential homeowners would need to show they can sustain their potential mortgages on the base of the minimum “qualifying rate” of their lender.
Eligibility Requirements Of The Program
This recent program would be administered via the Canada Mortgage and Housing Corporation (CMHC) and provide up to $1.25 billion to eligible homebuyers over three years. Some of the proposed eligibility requirements for the program are:
- Households with incomes lower than $120,000 can be eligible to receive a 5-10% incentive (like an interest-free loan) towards their home purchase.
- Homebuyers must have a minimum down payment of at least 5% (insured mortgage).
- The maximum mortgage value plus CMHC loan is capped at around $560,000.
The announcement by the government stated that this change was a conclusion of a review by federal financial agencies. It deduced the least qualifying rate “should be more dynamic to better reflect the evolution of market conditions.”
The finance press release department said that the overall mortgage standards are “working to ensure that homebuyers are able to afford their homes even if interest rates rise. Also, even if the incomes change, or families are faced with unforeseen expenses.” This modification to the stress test will let it be more reflective of the mortgage rates given by the lenders and better respond to the conditions of the market it stated.
Government To Keep An Eye Out On The Housing Market
For the Canadians who belong to the middle class, their property or home is most likely to be the most important investment of their life. It is the responsibility of the Canadian government to make sure that investment is protected. Also, they need to ensure their support in building a housing market that is stable. The government of the nation will continue monitoring the real estate market. Also, it will keep an eye for the changes that it can make for betterment. Reviewing of the stress tests is crucial as it helps in making sure that it is well-responsive to the market conditions.
Laird anticipates that the stress test will fall down to about 4.89 percent once the modification takes effect, considering present market rates. “Canadians who are getting insured and insurable mortgages can expect to qualify for a little bit more than what they can today,” he said.
Capital Economics’ senior Canada economist Stephen Brown notes that while the stress test rule would likely mean that Bank of Canada would not change interest rates soon.
Brown also stated that reduction in the severity of stress would further put higher pressure on house prices. This is when the sales-to-new listing ratio is already indicating high house price inflation in the future. “The dilemma the Bank currently faces, between the need to support activity on the one hand and the need to limit the build-up of financial risks on the other, will only get worse.”
Alterations In The Housing Market
A few alterations that have affected the real estate market over the past year, including:
- A stress test for all insured mortgages where the home buyer has less than 20% down payment, with new buyers having to qualify for mortgage loans at the Bank of Canada’s (BoC) benchmark rate – effective November 2016.
- Restriction of mortgage insurance to owner-occupied dwellings, shorter maximum amortization period, a purchase price of less than $1 million, and a minimum credit score of 600.
- A maximum Gross Debt Service ratio of 39% and Total Debt Service ratio of 44% – calculated using the higher stress-test rates.
- Increase in the mortgage default insurance premium payable on insured mortgages to as high as 4% – effective March 2017.
- The imposition of a 15% foreign buyers tax in British Columbia (August 2016) and Ontario (April 2017), plus other control measures.
- A similar stress-test for uninsured mortgages where the buyers have 20% or more of their down payment – starting January 2018.
- A stress-test will also be conducted when homeowners who are refinancing their mortgage change lenders.
- Individuals selling real estate in British Columbia are now required to disclose their residency status in Canada for tax purposes. This is to ensure that foreigners or non-tax residents do not avoid paying taxes on capital gains resulting from the sale of property designated as a principal residence – effective November 27, 2017.
- A new “speculation tax” in B.C. that imposes a 0.5% tax (for 2018) on the assessed value of homes that are owned by non-residents (or vacant) was unveiled in the B.C. Budget announced on February 20, 2018. The tax will increase to 2.0% in 2019.
- The foreign buyers’ tax of 15% that was introduced in British Columbia in 2016 has been increased to 20% as of February 21, 2018. The area of coverage for the tax has also been widened to include Metro Vancouver plus the Capital Regional District, Fraser Valley, Central Okanagan, and the Nanaimo Regional Districts.
With a healthy and stable housing market on the one hand and many new and upcoming home buyers, there will always be mixed opinions about the new changes. However, the effect up to which it should affect someone personally should solely depend on your own abilities to afford a house.
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