Tidbits on changes to mortgage rules and the primary residence capital gains exemption.
In October, the federal government announced changes to the guidelines for borrowers of high-ratio mortgages.
Let’s first look at the difference between a high ratio insured mortgage and conventional or low ratio non-insured mortgage.
- An ‘Insured Mortgage’ is one where a home buyer has less than 20% of the purchase price to use as a down payment, so the mortgage must be insured by either Canada Mortgage and Housing Corporation (CMHC), Genworth, or Canada Guaranty. The insurance premium is passed on to the borrower. This insurance provides security to the lender in the event of home buyer default.
- A Non-Insured Mortgage is when a home buyer has 20% or more for a down payment and therefore is not required to pay mortgage insurance.
So what is the primary change in the new guidelines and its impact?
- The mortgage rate stress test must be applied to all insured mortgages. Let’s begin with an explanation of the stress test… All insured mortgages, regardless of term or type (i.e., fixed or variable) will now have to qualify on the Bank of Canada rate. For buyers with less than 20% down, the biggest effect of this change will be on the amount that they qualify to borrow. Previously, buyers qualified at the ‘lender’ contract rate, rather than at the ‘Bank of Canada’ rate*.
- For buyers with 20% or higher down payment, there is no significant impact anticipated.
*Qualifying rate is the Bank of Canada Conventional 5-year fixed posted rate.
*Contract rate is the rate offered by the lender on which the home buyer’s actual mortgage payments are based.
For anyone selling their primary residence, be aware that there are new reporting rules for the capital gains exemption. Currently, any financial gain from selling your primary residence is tax-free and does not have to be reported as income. As of this tax year, while capital gains are still waived for the sale of a primary residence, the sale must be reported nevertheless, at tax time to the Canada Revenue Agency. This change is aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax emption for which they’re not entitled.