On October 17 some new mortgage rules will be implemented. They have caused a lot of confusion and concern, even among Realtors.

New Qualifying Rules For High Ratio Mortgages

For real estate purchases with a high ratio mortgage, new qualification rules are being implemented starting October 17th. A high ratio mortgage is one where the purchaser makes a down payment of less than 20% of the purchase price. A high ratio mortgage must be insured by either CMHC (Canada Mortgage and Housing Corporation) or by a private insurer. The purchase price must be less than $1 million (in order to purchase with a down payment of less than 20%). The new rules apply to these high ratio mortgages; instead of qualifying for a loan using the current competitive interest rates, which are below 2.5%, the buyer must qualify for a loan using the Bank of Canada Benchmark rate (currently 4.64%).rates2

If the buyer qualifies for a loan, the mortgage payments will still be calculated and paid at the lower interest rate. However, the higher qualifying rate means that some people may not be able to qualify for a loan, or as large a loan as before. It’s expected that about 8% of homebuyers will no longer qualify to purchase. For purchasers who must qualify at the higher benchmark rate, this means that instead of qualifying for a $749,000 mortgage, their new maximum will be $625,000. It is expected that this change will affect first-time buyers the most. In addition, most non-bank, monoline mortgage companies (companies that have only one product, mortgages) insure all mortgages they sell, whether or not they are high ratio mortgages. In other words, these mortgages will use the new qualification rules as well. So, if you are buying with at least 20% down or more, it may be in your best interest to use a bank and not a monoline mortgage company.

New Rules For Foreign Buyers

The other key change was aimed at foreign buyers: i.e., buyers who were neither permanent residents nor citizens of Canada when they purchased real estate. Actually, the change is about foreign “sellers”. A foreign seller must now apply for a clearance from the Canada Revenue Agency (CRA) to grant them a principal residence capital gains tax exemption. If a foreign seller is unable to obtain the tax exemption, the lawyer for the buyer must withhold 25% of the purchase price to satisfy future tax obligations of the seller. If this isn’t done, CRA can collect any tax payable from the new buyer. Previously, if the foreign seller was neither a permanent resident nor a citizen when they purchased, but subsequently obtained residency or citizenship before selling, the CRA would incorrectly allow the person qualify for the principal residence exemption, with the result that no capital gains tax would be owed. What the CRA should have been doing, and will now enforce, is to apply the principal residence tax exemption only for those years in which the seller was either a permanent resident or a citizen.

Lack Of Inventory Is The Key Issue

The real source of rising prices is lack of inventory. There are only 1,650 houses and 3,200 condominiums in a city of 2.5 million and a regional population of over 5.5 million. Add to this, new listings are down 36% since a year ago, but sales are up 20%+. With such demand, and more people going after less product, prices will naturally rise. This month average prices are up 21% over last year. This is simply the normal rules of supply and demand.

– Chip Barkel, MCNE, SRES, REDM, Toronto Real Estate. Extraordinary Service. Top Results.