October began with the government’s announcement of widespread changes to the mortgage lending process. The legislation intends to limit the risk and prevent fraud, an important concern since the federal government backs mortgage insurance. The majority of the changes appear to target managing financial risk and concerns regarding foreign buyers buying and flipping Canadian real estate.
Amongst the new legislation is the requirement that all primary residential sales are reported to the Canada Revenue Agency (CRA). This rule should have no impact on foreign buyers and sellers. As discussed in a recent blog, foreign sellers are required to report the residential sales to the CRA.
All mortgages will be required to pass a financial stress test regardless of the down payment amount. This test tries to prove the borrower can afford the mortgage should interest rates rise. As part of the test, lenders calculate the buyer’s debt-to-income ratio of home carrying costs to income, home carrying costs plus additional debt to income, and ability to qualify for the loan against the Bank of Canada’s five-year fixed posted mortgage rate. This ensures home buyers are qualified for their purchase.
The most significant change for foreign buyers is a small one. New restrictions place limits on low-ratio mortgage insurance. The insurance will only be provided for properties with a purchase price of less than $1 million, on loans with 25-years or less amortization periods, and a buyer credit score greater than 600.
The government changes appear to target Vancouver and Toronto, Canada’s two most competitive real estate markets. However, none of these changes restrict a foreign buyer’s ability to find real estate in Toronto at a great price. Qualified buyers should not be discouraged by any of these legislative changes. If concerned, please ask Barry Cohen if the new rules will impact your home buying experience.