Creating Stability in the Canadian Housing Market

Matt Chan • Oct 03, 2016

This morning, Finance Minister Bill Morneau announced new housing measures, changes meant to alleviate risk in Canada’s current housing market. The measures include:

Standardizing lending criteria for high- and low-ratio mortgages, including a mortgage stress test
Closing tax loopholes for capital gains exemptions on principal residence sales
Consulting with industry stakeholders to ensure risk is properly distributed.

It is good to note that these changes will not have any impact on existing mortgage holders, they will be applied going forward.

“Canadians have told us they are concerned about growing household debt and rapidly rising house prices in some of our biggest cities, particularly in markets like Toronto and Vancouver. These concerns have grown over many years, and there are no quick fixes. The federal government plays an important role in ensuring that housing markets are stable and function efficiently. My colleagues and I are committed to continuing to work with provinces and municipalities to address the concerns of middle class families, and to ensure Canada’s housing markets and financial system remain strong, stable and resilient well into the future.”

– Bill Morneau, Minister of Finance

During his press conference, the Finance Minister said repeatedly that he believes the housing market is stable, and that these are simply preventative measures. Over the next week there will be more information available about the specifics of what this announcement means, and that will be shared here, however in the mean time, here is the announcement from the government found on the Department of Finance website.

Backgrounder: Ensuring a Stable Housing Market for All Canadians

Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it. Recognizing that for many families, their homes are their most important asset, the Government is taking preventative measures today to ensure a healthy, competitive and stable housing market for all Canadians.

Today’s actions recognize the effect that years of low interest rates and shifting attitudes towards debt and indebtedness have had on the housing market. While the overall Canadian housing market is sound, house prices have risen significantly in some markets, notably Toronto and Vancouver, and some borrowers are taking on high levels of debt. In these circumstances, it is important to ensure that these debt levels are sustainable, that lenders are acting prudently, and that financial stability risks do not arise in the event of increases in interest rates or a housing market downturn.

The Minister of Finance has been actively engaged on the housing file. One of the Government’s first steps since being elected nearly a year ago was to address pockets of risk in the housing market by raising the minimum down payment for homes priced above $500,000. Since then, Department of Finance Canada officials have been further studying the housing market, and have led a working group with municipalities and provinces, as well as federal agencies such as the Office of the Superintendent of Financial Institutions and Canada Mortgage and Housing Corporation.

This in-depth analysis, informed by the productive dialogue with our partners, has informed today’s announcement of three complementary measures designed to reinforce the Canadian housing finance system, to help protect the long-term financial security of borrowers, and to improve tax fairness for Canadian homeowners. Analysis and cooperation are ongoing as the Government continues to carefully monitor the situation.

1. Bringing Consistency to Insured Mortgage Rules

“Mortgage rate stress test” for all insured borrowers:

To help ensure new homeowners can afford their mortgages even when interest rates begin to rise, mortgage insurance rules require in some cases that lenders “stress test” a borrower’s ability to make their mortgage payments at a higher interest rate. Currently, this requirement only applies to a subset of insured mortgages with variable interest rates or fixed interest rates with terms less than five years. Effective October 17, 2016, this requirement will apply to all insured mortgages , including fixed-rate mortgages with terms of five years and more. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.

Safer lending:

There are currently different rules in place depending on what proportion of the value of the property is covered by a loan. For example, mortgage insurance criteria for a loan that represents 80 per cent of the value of the property or less ( low loan-to-value ratio mortgages) are not as stringent as for high loan-to-value ratio mortgages (loans that represent more than 80 per cent of the value of the property). This could lead to increased risk for the taxpayers who ultimately back insured mortgages. To help ensure that taxpayer support for mortgage funding is targeted towards safer lending, effective November 30, 2016, mortgages insured by lenders through portfolio insurance and other low loan-to-value ratio mortgage insurance must meet the same loan eligibility criteria as high loan-to-value insured mortgages.

2. Improving Tax Fairness and Closing Loopholes

The Government is committed to tax fairness, and to ensuring that the exemption from capital gains tax on the sale of a principal residence is available only in appropriate cases. Proposed changes to the tax rules would ensure that the principal residence capital gains exemption is not abused, including by non-residents buying and selling a property in the same year. An additional measure would improve compliance and administration of the tax system with respect to dispositions of real estate, including the sale of a principal residence.

3. Managing Risk and Protecting Taxpayers

The Government continuously monitors the housing market and is committed to implementing policy measures that maintain a healthy, competitive and stable housing market. As a part of this effort, the Government is looking at whether the distribution of risk in Canada’s housing finance system is balanced, and appropriately reflects all parties’ abilities to share in the management of housing risks.

To this end, the Government will launch a consultation process with market participants this fall on lender risk sharing, a potential policy option that would require mortgage lenders to manage a portion of loan losses on insured mortgages that default. Currently, lenders are able to transfer virtually all of the risk of insured mortgages to mortgage insurers, and indirectly to taxpayers through the government guarantee.

If you have any questions about what any of this means, please don’t hesitate to contact us anytime!

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Locking in a Variable Rate Mortgage

By Matthew Chan • 01 May, 2024

If you have a variable rate mortgage and recent economic news has you thinking about locking into a fixed rate, here’s what you can expect will happen. You can expect to pay a higher interest rate over the remainder of your term, while you could end up paying a significantly higher mortgage penalty should you need to break your mortgage before the end of your term. Now, each lender has a slightly different way that they handle the process of switching from a variable rate to a fixed rate. Still, it’s safe to say that regardless of which lender you’re with, you’ll end up paying more money in interest and potentially way more money down the line in mortgage penalties should you have to break your mortgage. Interest rates on fixed rate mortgages Fixed rate mortgages come with a higher interest rate than variable rate mortgages. If you’re a variable rate mortgage holder, this is one of the reasons you went variable in the first place; to secure the lower rate. The perception is that fixed rates are somewhat “safe” while variable rates are “uncertain.” And while it’s true that because the variable rate is tied to prime, it can increase (or decrease) within your term, there are controls in place to ensure that rates don’t take a roller coaster ride. The Bank of Canada has eight prescheduled rate announcements per year, where they rarely move more than 0.25% per announcement, making it impossible for your variable rate to double overnight. Penalties on fixed rate mortgages Each lender has a different way of calculating the cost to break a mortgage. However, generally speaking, breaking a variable rate mortgage will cost roughly three months of interest or approximately 0.5% of the total mortgage balance. While breaking a fixed rate mortgage could cost upwards of 4% of the total mortgage balance should you need to break it early and you’re required to pay an interest rate differential penalty. For example, on a $500k mortgage balance, the cost to break your variable rate would be roughly $2500, while the cost to break your fixed rate mortgage could be as high as $20,000, eight times more depending on the lender and how they calculate their interest rate differential penalty. The flexibility of a variable rate mortgage vs the cost of breaking a fixed rate mortgage is likely another reason you went with a variable rate in the first place. Breaking your mortgage contract Did you know that almost 60% of Canadians will break their current mortgage at an average of 38 months? And while you might have the best intention of staying with your existing mortgage for the remainder of your term, sometimes life happens, you need to make a change. Here’s is a list of potential reasons you might need to break your mortgage before the end of the term. Certainly worth reviewing before committing to a fixed rate mortgage. Sale of your property because of a job relocation. Purchase of a new home. Access equity from your home. Refinance your home to pay off consumer debt. Refinance your home to fund a new business. Because you got married, you combine assets and want to live together in a new property. Because you got divorced, you need to split up your assets and access the equity in your property Because you or someone close to you got sick Because you lost your job or because you got a new one You want to remove someone from the title. You want to pay off your mortgage before the maturity date. Essentially, locking your variable rate mortgage into a fixed rate is choosing to voluntarily pay more interest to the lender while giving up some of the flexibility should you need to break your mortgage. If you’d like to discuss this in greater detail, please connect anytime. It would be a pleasure to walk you through all your mortgage options and provide you with professional mortgage advice.

Credit and Mortgage Financing

By Matthew Chan • 24 Apr, 2024

Credit. The ability of a customer to obtain goods or services before payment, based on the trust that you will make payments in the future. When you borrow money to buy a property, you’ll be required to prove that you have a good history of managing your credit. That is, making good on all your payments. But what exactly is a “good history of managing credit”? What are lenders looking at when they assess your credit report? If you’re new to managing your credit, an easy way to remember the minimum credit requirements for mortgage financing is the 2/2/2 rule. Two active trade lines established over a minimum period of two years, with a minimum limit of two thousand dollars, is what lenders are looking for. A trade line could be a credit card, an instalment loan, a car loan, or a line of credit; basically, anytime a lender extends credit to you. Your repayment history is kept on your credit report and generates a credit score. For a tradeline to be considered active, you must have used it for at least one month and then once every three months. To build a good credit history, both of your tradelines need to be used for at least two years. This history gives the lender confidence that you’ve established good credit habits over a decent length of time. Two thousand dollars is the bare minimum limit required on your trade lines. So if you have a credit card with a $1000 limit and a line of credit with a $2500 limit, you would be okay as your limit would be $3500. If you’re managing your credit well, chances are you will be offered a limit increase. It’s a good idea to take it. Mortgage Lenders want to know that you can handle borrowing money. Now, don’t confuse the limit with the balance. You don’t have to carry a balance on your trade lines for them to be considered active. To build credit, it’s best to use your tradelines but pay them off in full every month in the case of credit cards and make all your loan payments on time. A great way to use your credit is to pay your bills via direct withdrawal from your credit card, then set up a regular transfer from your bank account to pay off the credit card in full every month. Automation becomes your best friend. Just make sure you keep on top of your banking to ensure everything works as it should. Now, you might be thinking, what about my credit score, isn’t that important when talking about building a credit profile to secure a mortgage? Well, your credit score is important, but if you have two tradelines, reporting for two years, with a minimum limit of two thousand dollars, without missing any payments, your credit score will take care of itself, and you should have no worries. With that said, it never hurts to take a look at your credit every once and a while to ensure no errors are reported on your credit bureau. So, if you’re thinking about buying a property in the next couple of years and want to make sure that you have good enough credit to qualify, let’s talk. Connect anytime; it would be a pleasure to work with you and help you to understand better how your credit impacts mortgage qualification.

Notes on the Federal Budget

By Mortgage Plan • 19 Apr, 2024

Sherry Cooper has done a great analysis of the upcoming Federal Budget. You can see it here: Sherry Cooper Federal Budget 2024 One of the key themes of the budget is to tax the wealthy namely through increase taxes on capital gains. Currently, 50% of capital gains are taxed. Under new proposal, 50% capital gains tax will still apply for the first $250,000 but will rise to 66.6% on income above $250,000. Implications to real estate investors: - the tax is targeted to the wealthiest Canadians BUT there will be impact to the middle class real estate investors and can lead to higher taxes for middle class Canadians. - disincentive for Canadians to buy investment properties - disincentive for Canadians to buy under a corporation as corporations and trusts are taxed for entire capital gains at 66% rather than just the gains over $250,000 for individuals. With these changes, it is important to work with a team of professionals (mortgage broker, realtor, financial advisor and accountant) that can properly advise and help you navigate the intricacies of buying and selling investment properties. Be sure to consult with a great team of knowledgeable professionals when looking to buy and sell real estate. The other changes: - increase amortization to 30 years for new builds Likely minimal effect on affordability as it likely will increase demand - increase in RRSP withdrawal limit to $60,000 from $35,000 In my career, I rarely see a first time buyer with over $25,000 in RRSPs so likely a very minimal impact on actual first time buyers Reach out to me if you have any comments or questions.