Whenever there are changes announced in mortgage rules, you can always feel the tension in the market. With each party trying to save its own interests, things can get very murky when governments try to create policies that are equally acceptable to all. It's no surprise then, that there is always someone losing in every revision that is made. The latest revision in Canada's mortgage rules indicates that this time, it could be the consumers who will be facing a tough time.
One of the major reasons for the Liberal Government making the revisions was the high rate of defaults that mortgage companies have been taking as personal bankruptcies are growing along with the record household debt rates. Home-buyers have been taking on mortgages that are bigger than what they can actually afford because of the past few years of very low-interest rates. This added to the sharp increase in real-estate prices (especially in high-demand areas like Vancouver and Toronto) will only result in more defaulting going forward. Right now, consumers are taking on mortgages, thanks to the current low-interest rates. However, the all-time low in interest rates may not be permanent and an upward trend may be around the corner. This rise in interests could lead to home-buyers finding it difficult to pay back their loans, thereby leaving lending companies and banks at a loss.
What has changed?
Among the many changes, the most notable is that all insured-mortgage seekers will have to undergo a mortgage rate stress test. This test has been compulsory for all from the 17th of October. Previously, only those home-buyers whose down payment was less than 20% of the total cost of the house had to give this test. From now on, however, not only will these 'high-ratio' mortgage takers have to give the test, but all the others as well. The simple logic that has prompted this move is that it has been observed that just because home-buyers can afford 'low-ratio' mortgages currently don’t mean that they will be able to meet the demands of increasing prices in the future. As such, the government thought that it would only make sense to subject all home-buyers to these tests so that their ability to match up with the future rise in prices can be ascertained.
This obviously will lead to more loan requests getting turned down, thereby leading to a fall in the number of people who will buy a home. However, how the people who need a new home are going to react in this situation is the question. Quite possibly, those who really want to get their own home will have to go for the unregulated, uninsured but expensive mortgages by private companies.
Buying and selling just got more difficult
The new rules would simply cause a decrease in home-buying. As a result, a homeowner who wants to sell their home may find that things have gotten a little tougher. Since the lending companies are giving smaller amounts of loans, and to fewer applicants than before, sellers may have a tough time finding buyers. Even if they do, they may be forced to sell their property at a lower price than what it could have been sold for.
If you have newly purchased a home, you would be sorely disappointed that your house is now worth less than what you paid for when buying it. If you are looking forward to selling it anytime soon, you may end up incurring a huge loss.
What else can I expect from the changes?
Until now, the money you got from selling a house was not considered as 'taxable income'. This money did not even have to be reported to tax authorities. Now, the government has made it compulsory to report this income to the Canada Revenue Agency when it's time for taxes.
Foreign home buyers too are going to face a new set of regulations. From now on, if you are a foreigner trying to sell a home, you will have to first prove that the home has been your primary residence. This to prevent the tax-exemption on the sale of primary residences from being misused.
How these changes in mortgage rules are going to affect home-buying is still a matter of speculation. As of now, we can only hope that Finance Minister Bill Morneau's changes will have a positive effect on Canada's real-estate market in the long run.
