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New rules for government backed insured mortgages

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Jatinder Rosha

Jatinder Rosha

In a bid to cool its hot housing market, British Columbia introduced a 15-per-cent tax on foreign buyers this summer, which applies to the sale of all residential properties within 22 communities of metro Vancouver. The levy applies to buyers who are not Canadian citizens or permanent residents, and corporations that are either not registered in Canada or are controlled by foreigners, and it adds $300,000 to the purchase of a $2-million home.

The federal government has also announced new rules for government-backed insured mortgages –

Expanding a mortgage rate stress test to all insured mortgages-

Expanding stress tests to all insured mortgages, not just high-ratio mortgages in which the buyer has put down less than 20 per cent of the purchase price. This may make it harder for some buyers to get insured mortgages, even if they make a larger down payment, because it ends a two-tier system where some mortgages were weighed differently against the buyer’s income to see whether the mortgage is affordable.

Starting Oct. 17, borrowers who take out insured mortgages that are fixed-rate loans of five years or longer will be subjected to a more stringent “stress test,” ending a two-tier system for the country’s mortgage market.

Existing rules require home buyers who take out short-term or variable-rate mortgages with down payments of 20 per cent or less to prove they can afford payments at a much higher interest rate than they will actually pay. Meanwhile, borrowers who take out fixed-rate insured mortgages of five years or longer have their income tested against the interest rate that they will actually be paying.

The end result is that borrowers can now typically qualify for much larger mortgages if they opt for a longer-term, fixed rate mortgage.

Under the new rules, all borrowers who have insured mortgages will have to qualify at the most common rate posted by the Bank of Canada, which is now about 2 percentage points higher than the discounted mortgage rates offered by most lenders. The rules apply only to new mortgages, not renewals, but they are significant given that a majority of homeowners are thought to take out the types of fixed-rate mortgages that will be affected by the stricter qualification requirements.

Low-ratio mortgages-

As of Nov. 30, the government will impose new restrictions on when it will provide insurance for low-ratio mortgages. The new rules restrict insurance for these types of mortgages based on new criteria, including that the amortization period must be 25 years or less, the purchase price is less than $1-million, the buyer has a credit score of 600 and the property will be owner-occupied. A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate.

This measure appears to be aimed at lowering the government’s exposure to residential mortgages for properties worth $1-million or more, a category of the market that has increased sharply in recent years in Vancouver and Toronto.

Principal-Residence tax changes-

Closing a tax loophole that some foreign buyers have used to claim exemptions in capital-gains tax for selling properties that they falsely claim as their primary residences. Now, home buyers must file taxes in Canada, as a resident, the same year they buy a home, before they can later claim the principal residence exemption on any gains for that year.

The tax rules around principal residences are so complex that many Canadians simply don’t recognize when they might owe tax when they sell a property. Many have assumed that every sale of a residence is always tax-free thanks to the principal-residence exemption (PRE). And the taxman has not required Canadians to report the sale of a principal residence if the PRE will shelter the full gain from tax. The result has been that many have sold residences, have not reported the sale, have paid no tax, even in situations where tax should have been owing. These dispositions have gone largely undetected by the taxman. That’s changing.

The new rules will require you to report every sale of a principal residence on your tax return, whether you owe tax or not.  In other words everyone who sells their primary residence will have a new obligation to report the sale to the CRA .And this starts with dispositions in 2016. So, if you sold a home earlier this year, you’ll have to provide basic information (date of purchase, proceeds of disposition and a description of the property) on Schedule 3 when you file your 2016 tax return.

In British Columbia the market had already begun to cool down. The sales of condominium , townhouse &  detached homes  has dropped significantly. Multiple offer situation is becoming a thing of the past and speculators seems to be at the verge of extinction .

Home sales in the Vancouver area fell by 33 per cent in September compared with the same month last year as the market adjusts to the B.C. government’s 15-per-cent tax on foreign buyers, according to data recently released  by the Real Estate Board of Greater Vancouver. The tax took effect on Aug. 2

According to data released by the B.C. government recently, billions of dollars in Metro Vancouver real estate deals dried up virtually overnight after Clark introduced a 15 per cent tax on foreign nationals last month. According to the data, in the seven weeks before the tax was introduced (June 10 to Aug. 1) the total value of all residential sales involving foreign nationals was $2.3 billion — an average of $329 million per week. After the tax was introduced, the value of sales over a four-week period (Aug. 2 to 30) plunged to $46.9 million — an average of $11.8 million per week.

The percentage value of sales involving foreigners also fell from 16.5 per cent of all sales to 0.7 per cent in the month after the introduction of the new tax, the latest numbers also revealed. As per data published by   Real Estate Board of Greater Vancouver on Oct. 4, 2016 the Metro Vancouver* home sales dipped below the 10-year monthly sales average last month. This is the first time this has occurred in the region since May 2014. Metro Vancouver home sales totalled 2,253 in September 2016, a decrease of 32.6 per cent from the 3,345 sales recorded in September 2015 and a decrease of 9.5 per cent compared to August 2016 when 2,489 homes sold. Last month’s sales were 9.6 per cent below the 10-year sales average for the month. The MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $931,900. This represents a 28.9 per cent increase compared to September 2015 and a 0.1 per cent decline compared to August 2016.

Prices though have stalled but have not come down significantly yet. Will the direct intervention by government lead to housing affordability, is yet to be seen?

Jatinder Rosha is a Realtor with Amex Fraseridge Realty and could be reached at 604-725-9091.

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