How Four Major Changes to Canada’s Housing Rules Will Affect Us All

2016-11-08

Earlier this month, Canada’s Finance Minister Bill Morneau introduced important legislation designed to address the so-called ‘housing bubble’ in this country. The proposed measures are significant.

Change 1: Expanding a mortgage rate stress test to all insured mortgages

As of October 17, a stress test used for approving high-ratio mortgages will be applied to all new insured mortgages – including those where the buyer has more than 20 per cent for a down payment. The test is aimed at assuring the lender that the homebuyer could still afford the mortgage should interest rates rise.

Change 2: Restrictions on insurance for low-ratio mortgages

From November 30, the government will impose new restrictions on when it will provide insurance for low-ratio mortgages. The homebuyer would need to qualify for a loan at the negotiated rate in the mortgage contract, but also at the Bank of Canada’s five-year fixed posted mortgage rate.

Change 3: New rules for the primary residence capital gains exemption

Currently, any financial gain from selling a primary residence is tax-free and does not have to be reported as income. As of this tax year, the capital gains tax is still waived, but the sale of the primary residence must be reported at tax time to the Canada Revenue Agency.

Change 4: Government launching consultations on lender risk sharing

Currently, the federal government is on the hook to cover the cost of 100 per cent of an insured mortgage in the event of a default. The government contends that this is “unique” internationally and that it will be releasing a consultation paper shortly on a proposal to have lenders, such as banks, take on some of that risk.

What These Changes Mean

These changes are designed to improve tax fairness, introduce risk sharing for lenders, and restrain runaway house price inflation in Toronto, Vancouver and, potentially, Montreal . They are intended to promote prudent lending practices.

These changes are also aimed at preventing foreign buyers who buy and sell homes – flipping – from claiming a primary residence tax exemption for which they are not entitled. This practice artificially pumps up real estate prices.

These changes will, however, have a potentially negative impact on one of the most important industries in Canada. Residential real estate is a key growth factor in the Canadian economy. The entire industry will be affected.