What’s the Impact of New Mortgage Rules?

Federal Minister of Finance, Bill Morneau, announced in October 2016 a series of measures to stabilize the real estate market. Here’s the breakdown.

Alexandre and his wife purchased their first property one minute to midnight, 48 hours before the new federal mortgage measures entered into force on October 17. "We were really happy to not have to deal with the new regulations," admits Alexandre.

The couple are among other first-time buyers who don’t have a down payment worth 20% of the property purchase price. Under the new regulation, the couple would have had to undergo a crisis simulation test, not with their actual interest rate (3% fixed over 5 years), but rather with the Bank of Canada’s reference interest rate, which currently sits at around 4%. Despite this, the couple probably would have qualified, admits Alexandre. However, not everyone is so fortunate. The Canada Mortgage and Housing Corporation (CMHC) estimates that between 5 and 10% of buyers will be affected by the new regulation over the next 12 months.

Here is a look at the new mortgage reality and the impact it will have on first-time buyers.

Direct impact and indirect impact

Some of the new measures have a direct impact on consumers, as it is the case with the new requirement to pass a crisis simulation test for higher loan-to-value ratio loans.

"The other measure that directly affects consumers concerns is foreign buyers," explains Paul Cardinal, Director of Market Analysis at the Québec Federation of Real Estate Boards. The tax exemption on sales revenues resulting from the sale of a main residence is hereafter reserved to Canadian residents."

However, these new measures do not apply to the minimum amount required for the down payment, which remains at 5%.

As for the other regulations announced in October 2016, they mainly affect banking institutions and mortgage insurers. First, banks must keep on hand a greater proportion of liquid funds on insured loans. While insurers have to maintain a higher level of minimum capital. "This is going to pressure mortgage rates to increase," predicts Paul Cardinal.

Consequently, many potential buyers will have to revise their plan. "Some people will give up on the idea of becoming owners," highlights Patrick Perrier, Deputy Chief Economist at the CMHC. "Others will opt to hold off on purchasing or revise their price bracket downward."

Regulations stacked onto other regulations

"The reason put forth to justify the introduction of new measures is to counter the excessive rise in prices on the Canadian real estate market," analyzes Paul Cardinal. "Overall, they’re looking to prevent a real estate crisis, like what happened in the United States in 2008."

Moreover, the first mortgage measures are rising to that year: the minimum down payment then had been set at 5%, to be later increased to 10% on the bracket exceeding the $500,000 mark.The amortization period was reduced from 40 to 35 years, to then be lowered again to 30 years in 2011, then to 25 years in 2012.

Should we expect more measures? The answer is yes. The Federal Government has already announced that it will assess risk sharing between lenders and insurers. "If the banks see themselves as restricted in assuming a greater share of risk on completed loans," says Paul Cardinal, "it is clear that they will ask for a higher return in exchange."

Are all these measures necessary?

Real estate market analysts and stakeholders are quick to underline the reliability, stability and overall healthy condition of the Canadian real estate market. The most recent CMHC report, however, calls for caution, identifying "increased signs of problematic conditions" in several markets in the country, including Toronto and Vancouver.

"There is also an underlying goal in the backdrop," points out Paul Cardinal. "To prevent households from falling into debt." In the current state, an increase of interest rates by a few points would have a devastating effect on many owners. Alexandre recognizes that it would be difficult for him to absorb an increase of $100 in his monthly expenses, if rates were to bubble up five years from now, when it is time to renegotiate his loan.

It is important to remember that although these measures make access to property a bit more difficult for certain buyers, they also aim to prevent those family crises that can occur when we are asked to return the keys to a home that we can no longer afford...

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