New Mortgage Rules Canada for 2022 and What Home Buyers Need to Know
This year has seen Canadian real estate prices fly, with price hikes of 25 percent to 30 percent in several of the major markets.
As a result of this overheating, the Office of the Superintendent of Financial Institutions (OSFI) has suggested increasing the minimum qualifying rate for uninsured mortgages to 5.25 percent.
This is a big jump from the existing 4.79 percent benchmark rate used by the main banks for stress-testing the finances of prospective house purchasers.
What the new guidelines mean is that purchasers who are applying for an uninsured mortgage will need to pass a harsher stress test and prove to a lender that their income supports a mortgage loan at the quoted rate plus 2 percent or 5.25 percent, whichever is greater.
Whether this new mortgage restriction will help temper the present frenzy in the real estate markets is unknown. That said, analysts are anticipating that this shift will diminish homebuyers’ purchasing power by around 4 percent to 5 percent.
Other options that have been discussed for limiting excessive increases in property prices include withdrawing the capital gains exemption from main residences.
New Mortgage Rules 2022
Below are some more mortgage restrictions that continue to apply in 2022:
- Homebuyers will require credit score of 680 or higher. This is 80 points up from the previous threshold of 600. If a couple is buying a property, one of the applicants must have a credit score of at least 680.
- The maximum gross debt ratio (GDS) is limited to 35 percent (down from 39 percent ) and the maximum total debt service ratio (TDS) is now 42 percent (down from 44 percent ).
Effectively, you will need to prove that a lesser percentage of your income is necessary to pay down your obligations.
- Borrowed money will no longer contribute towards your downpayment or be considered as equity when considerations are being made for your mortgage default insurance.
While these adjustments will likely affect some homebuyers, it is not as horrible as it sounds. There were early suspicions that the minimum downpayment amount was going to be raised from 5 percent to 10 percent.
New Mortgage Rules 2019-2020
The CMHC announced new mortgage guidelines that took effect on July 1, 2020. These adjustments tightened CMHC regulations and are intended at deterring higher-risk borrowers from taking on a mortgage they can’t pay.
A higher-risk borrower is a homebuyer with less than 20 percent property downpayment.
While these new laws were projected to result in house prices decreasing across the board by 9 percent to 18 percent, this did not happen.
There have been significant modifications to the mortgage regulations in Canada during the previous 3 years. The most prospective improvements cropped up in the 2019 federal budget i.e. the First Time Property Buyer Incentive which is intended at assisting first-time homebuyers afford a home in Canada’s ‘hot’ real estate market.
This initiative would be managed by the Canada Mortgage and Housing Corporation (CMHC) and offer up to $1.25 billion to qualifying homebuyers over 3 years. Some of the suggested qualifying conditions for the program are:
- Households with salaries less than $120,000 can qualify to get a 5-10 percent incentive (like an interest-free loan) towards their property purchase.
- Homebuyers must have a minimum downpayment of at least 5 percent (insured mortgage).
- The maximum mortgage value + CMHC loan is restricted at roughly $560,000.
- The idea allows homeowners to pay back the loan at any time with no interest. After 25 years, or when the house is sold, the loan must be repaid. New Home Buyer Incentive Program began September 2, 2019.
For example, on a $400,000 resale house, after deducting your 5 percent down payment ($20,000) and 5 percent incentive ($20,000), your mortgage amount is lowered to $360,000. This might cut your monthly mortgage expense by $120 from $1,971 to $1,851 (with a 3.49 percent mortgage rate).
The RRSP Home Buyers’ Plan will also be raised from $25,000 to $35,000 in the 2019 budget. Couples may now withdraw up to $70,000 tax-free from their RRSP to spend towards a property purchase.
Real Estate Rule Changes in Canada (2016-2018)
The Office of the Superintendent of Financial Institutions (OSFI) established new mortgage guidelines in 2017. The new guidelines require uninsured mortgages with a 20% down payment or more to pass the same “stress test” as high-ratio or insured mortgages.
That all homebuyers must qualify for mortgages at the higher of the Bank of Canada five-year benchmark rate or their lender’s mortgage rate plus two percentage points.
The real estate market had some big changes in these years, including:
- As of November 2016, new purchasers must qualify for mortgage loans at the Bank of Canada’s (BoC) benchmark rate, which includes all insured mortgages with less than 20% down.
- Limitation of mortgage insurance to owner-occupied homes, shorter maximum amortisation duration, and minimum credit score of 600.
- Total debt service ratio of 44% estimated using higher stress-test rates.
- Mortgage default insurance premiums on covered mortgages increased by up to 4% in March 2017.
- The application of a 15% foreign buyer’s tax in BC (August 2016) and Ontario (April 2017).
- A comparable stress-test for uninsured mortgages with a 20% down payment or greater — January 2018.
- A stress test is also done when homeowners refinance their mortgage.
- Individuals selling real estate in BC must now declare their Canadian residence for tax purposes. Effective November 27, 2017, this is to prevent foreigners or non-tax residents from avoiding paying capital gains taxes on property sold as a main residence.
- The B.C. Budget announced on February 20, 2018 a new “speculation tax” of 0.5 percent on the assessed value of non-resident (or unoccupied) properties. The tax was set to rise to 2.0% in 2019.
- The 15% foreign buyer’s tax implemented in 2016 in BC was raised to 20% as of February 21, 2018. The tax now covers Metro Vancouver, the Capital Regional District, Fraser Valley, Central Okanagan, and Nanaimo Regional Districts.
The rising and unsustainable debt of Canadian consumers, rising housing prices in Ontario and BC, and the potential hazards these concerns bring to the wider economy have driven these developments.
The “stress-test” assures homeowners can repay their mortgages even if rates rise. Also, the Bank of Canada has hiked its benchmark interest rate twice this year. As the economy improves, more rises in mortgage rates are expected.
Impact of New Rules
Increasing housing regulation frequently has predictable short-term results.
Generally, we may expect to see:
Demand for properties increased in November and December 2017 as pre-approved mortgages closed.
There was more activity in the lower-priced residences and less in the higher-price. The new guidelines will allow new homebuyers to get reduced mortgage rates.
Some slowing in the annual growth rate of housing prices, notably in Toronto and Vancouver.
Increased use of non-federally regulated lenders like credit unions.
New Mortgage Rules Affordability
Using RateHub’s Mortgage Affordability Calculator Example:
Old Rules: A $100,000 yearly income household may purchase a $693,405 property with a 20% down payment and a 2.84 percent 5-year fixed mortgage rate.
Modified rules: The household must qualify for a mortgage using 4.89 percent or 4.84 percent (calculated as 2% + 2.84%). By paying 20% down and amortising over 25 years, the family can now afford a $591 537 property.
The new regulations reduce the family’s affordability by $101,868. (-15 percent ). A bank that previously loaned them $700,000 may now only loan them around $600,000.
People will have varied perspectives on the new mortgage restrictions. Real estate agents and purchasers will despise the added trouble. However, homeownership is still attainable for many and there are options available to consider. Contact your realtor to find out more.