A number a well-publicized startups – like SpaceList and RealtyforSale – found many opportunities in the Canadian real estate market after a 2014 boom in housing sales. In early October 2016, Finance Minister Bill Morneau revealed four changes to existing housing laws. At worst, these changes are anticipated to have only a slight negative impact on the housing market; real estate startups can continue to be viable small business ventures.
Mortgage Rate Stress Test Expansion
While homebuyers seeking a mortgage previously faced a stress test to determine their ability to pay, the new law is aimed at a buyer’s ability to afford the loan if interest rates increased. Buyers must meet all qualifications for the loan at the negotiated rate in their mortgage contract and also qualify based on the Bank of Canada’s five-year fixed mortgage rate – an average of the mortgage rates of the six largest banks in Canada – which is sometimes higher than what buyers can afford.
The law affects homebuyers with a 20 percent minimum down payment who are trying to get a mortgage that they can’t reasonably afford if interest rates increase. Homebuyers who are more financially secure should have no trouble acquiring mortgages.
Restrictions for Low-Ratio Mortgages
The government is placing restrictions on the provision of insurance for low-ratio mortgages. The restriction rules for insurance on such mortgages are based on a new set of requirements for low-ratio mortgages, such as a purchase price that doesn’t exceed $1 million, an amortization period of 25 years or less, the property being occupied by the owner, and the buyer having a minimum credit score of 600.
This new law is directly aimed at people with residential mortgages on properties that are worth millions of dollars. The law is intended to lower government exposure to such mortgages, as this area of the market has risen dramatically in Toronto and Vancouver over the last few years. This law clearly affects a small sub-section of the population that can afford homes worth $1 million or more.
The sale of a primary residence must be reported to the Canada Revenue Agency at tax time. The waiver on capital gains tax remains in effect. While this law affects anyone selling a primary residence, it was enacted to prevent foreign buyers from buying and then selling homes in Canada and claiming the principal residence exemption to which they are not entitled. Ultimately, this law’s only significant financial impact is on such foreign buyers.
Lender Risk Sharing
Canada’s federal government is currently required to cover the entire cost of an insured mortgage that defaults. The government will soon release a consultation letter with a proposal to have mortgage lenders, such as banks, take on some of the financial burden. Ultimately, this is a proposal for a significant structural change for Canada’s housing finance system. While there may be future implications, such as higher mortgage interest rates, this step has no immediate impact on homebuyers.