Ready to purchase your new home? Before you do, you should know that Canada recently introduced new mortgage insurance rules.
Knowing and understanding how they will impact you will get you even closer to finding your dream home! Here, we have simplified what these changes are and how they will be implicated. Use this as a starting point in preparing for your new home purchase.
What exactly is mortgage insurance?
The technical term is mortgage default insurance. It is provided to banks or other financial institutions (lenders) through the three Canadian mortgage insurance companies including the Canada Mortgage and Housing Corporation (CMHC) and is backed by the government of Canada. The job of mortgage insurance is to protect the lender in the event of a borrower defaulting on their mortgage. The Canadian government requires that lenders carry mortgage insurance for mortgages they grant. To do this, the lenders look at the down payment a prospective borrower is making towards the property they intend to purchase. Based on the down payment, the lender will and/or may require high-ratio mortgage insurance or low-ratio mortgage insurance.
High-ratio insurees usually make down payments equal to less than 20 per cent of the property purchase price to a minimum of 5 percent. The law requires that lenders purchase mortgage insurance fto buyers for all high-ratio mortgages. This cost is always passed on to the homebuyer.
Low-ratio insurees usually make down payments equal to 20 per cent or more of the property purchase price. Lenders have the option of purchasing mortgage insurance for these homebuyers. This cost is usually paid by the lender.
In order for a lender to approve a mortgage loan, the buyer must meet the criteria for qualifying for mortgage default insurance. In other words, the buyer must prove they can manage payment of the mortgage. Here is where the changes kick in:
The Buyer’s Stress Test
Buyers with high-ratio mortgages will be required to qualify for mortgage insurance through a mortgage rate “stress test”. To do this, lenders will calculate a potential buyer’s Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. The GDS ratio is the percentage of a buyer’s gross monthly income that is required to pay their total monthly housing costs (principal, interest, property taxes & heating or P.I.T.H.). The new rules require that GDS be calculated using the Bank of Canada’s conventional five-year fixed mortgage rate NOT the rate the buyer will be paying*.
To qualify for mortgage insurance, GDS must not exceed 39%. The TDS ratio is the percentage of a buyer’s gross monthly income that is required to pay their total monthly P.I.T.H. PLUS payments on all other debt. The new rules require that TDS be calculated using the Bank of Canada’s conventional five-year fixed mortgage rate NOT the rate the buyer will be paying*. To qualify for mortgage insurance, TDS must not exceed 44%. By applying the higher interest rate in the calculation of GDS and TDS, the stress test can indicate a borrower’s ability to continue paying their debts in the event of rising interest rates or a reduction in household income.
Buyers with low-ratio mortgages will be subjected to the same high-ratio stress test as of November 30, 2016. In addition, key criteria they must also meet include (but are not limited to):
- A maximum amortization length of 25 years
- A property value of less than $1,000,000
- A minimum credit score of 600
*Unless the buyer’s contract mortgage rate is higher, then the higher rate is used.
The Seller’s Tax Declaration
When you sell your primary residence in Canada, the proceeds from the sale are exempt from taxes and sellers were not required to report it to Canada Revenue. The new rules require that taxpayers must report the sale on their tax return in order to claim the exemption. According to the Canada Revenue Agency (CRA): “These measures will ensure that the principal residence exemption is available only in appropriate situations.”
Still have questions?
When it comes to purchasing a home there is no doubt that knowledge is power. We strongly recommend that you visit the links below to learn more. After all, the more you know, the more prepared you will be to find the home you’ve always wanted. We invite you to contact us with any questions or if you’d like to further discuss any of these changes.
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