Whether or not you are looking to buy a new home or thinking about it for sometime in the future, it is a good idea to be aware of all things home ownership, such as the current housing market as well as the certain rules and regulations that revolve around mortgages.
Now, especially is an important time to take a moment to explore the ins and outs of home ownership, as there have been some key changes made in recent months that Canadian home buyers will want to brush up on.
With that being said, here is a summary of what’s new in home ownership.
Change #1: Stress Test Used to Approve High-Ratio Mortgages (Insured Home Loans)
For those home owners who aren’t able to put down more than 20% for a down payment, yet require a larger loan to cover the expense of their home, a stress-test is performed to ensure these borrowers can afford their loan size, should interest rates rise at any point during their term.
While before, home loan borrowers would be given a low-ratio mortgage with insurance that would cover up to 100% of their loan should they be unable to pay their mortgage in the long run, the stress-test is also now used where relatively large mortgages may be necessary, yet a higher down payment is not possible. In addition to being required to qualify for a negotiated rate, the test also means that home buyers can not spend more than 39% of the income on costs associated with home-carrying expenses, including taxes, heat and mortgage payments.
Overall, this change is in response to the likely belief that housing prices will continue to increase, even perhaps very suddenly, which could mean that borrowers are unable to afford their payments. In the end, the purpose of this new rule also hopes to help tackle high debt levels.
Change #2: Restrictions on Providing Insurance for Low-Ratio Mortgages
As of this past November, also new in home ownership are new rules surrounding low-ratio mortgages. Certain restrictions are now in place, such as the fact that the amortization period for these loans can be no longer that 25 years.
Additional changes include the requirement that the purchase price of the home must also be less than $1 million, and the home owner must have a credit score of at least 600. Lastly, one final restriction also dictates that the home being purchased is to be occupied by the owner.
As it would seem, this change is designed to lessen the residential mortgages in the $1 million or higher category seen by the government in high volume markets such as Toronto and Vancouver.
Change #3: Reporting Rules for Primary Residences (Capital Gains Exemption)
For home-sellers, this third rule relates to any capital gain they receive from the sale of their main place of residence. While previously, this financial gain went tax-free and did not need to be reported as a part of their income, the difference is that now any profit made on the sale of their home does remain tax-free for this upcoming tax season, however the sale does have to be revealed to the Canada Revenue Agency (CRA).
This home ownership change again, has also been made with a specific purpose in mind. Specially, this new restriction has been implemented as a method of hindering the sale of secondary homes owned by foreigner buyers, who have still been looking to claim a tax redemption on their non-primary Canadian residence.
Change #4: Lender Risk Sharing on Insured Mortgages
Up until now, the federal government was responsible for 100% of the cost of insured mortgages, should home owners default. Now however, the government will be looking to share that risk with banks and lenders as well.
In order to reduce their obligation to potentially widespread high default costs, the government also wants to ensure that lending practices across the country are exercised in a more well-advised manner.
In the end, these rules do seem to make sense and are created in large part to protect home owners in Canada. With the introduction of the foreign buyers tax, house prices may settle, enabling more authentic home values.
On the one hand, while it may seem that these new restrictions only create further barriers to owning a home, perhaps what they will also actually do is encourage more Canadians to approach home ownership with a more realistic perspective of how much they can afford.
Perhaps these changes can promote more obtainable home ownership, also minimizing the occurrence of home loan defaults across the country.
Once again, if you are hoping to buy a home sometime in the near future, you may also want to consider enlisting the help of a mortgage broker. Since they are experts in mortgages, they can also help to walk you through the mortgage process, also taking the time to further explain the recent re-workings of mortgage and home ownership rules.