Canada's new mortgage rules explained

Here's what you need to know about the new mortgage rules:

A major shift in mortgage rules was announced by the federal government this week, which could have a dramatic impact on the industry. 

The federal government says it’s responding to concerns that sharp increases in housing prices in Toronto, Vancouver and elsewhere could increase defaults in the future, should historically low interest rates finally start to climb.

The primary change is that all homebuyers seeking an insured mortgage, regardless of how much they have for a down payment, will be subject to a mortgage rate stress test beginning Oct. 17, 2016.

Before now, only those with less than a 20 per cent down payment were required to pass this particular test. 

The test measures whether the buyer could still afford to make payments if mortgage rates rose to the Bank of Canada’s posted five-year fixed mortgage rate. Today, that rate is 4.64 percent - as opposed to the average five-year fixed rate offered at most banks at 2.59 per cent.

Someone who would qualify for a mortgage of $600,000 may now only qualify for a morgage of $505,000. 

The stress test also sets a ceiling of no more than 39 per cent of household income being necessary to cover home-carrying costs such as mortgage payments, heat and taxes.

Until now, buyers with more than a 20 per cent down payment opting for mortgage insurance have escaped such scrutiny.

Another change to the mortgage rules relates low ratio insurance. Beginning Nov.30, 2016, new criteria for low-ratio insurance will take effect. To qualify, the mortgage’s amortization period must be 25 years or less, the purchase price be less than $1 million, the property be owner-occupied, and the buyer have a credit score of 600 or more.

What kind of an effect will this really have on the industry? It's yet to be seen. But mortgage insurance provider Genworth Canada estimates the new rules mean up to one-third of its first-time homebuyers will not qualify for a mortgage.

This will make it even more difficult for young people to get into the booming housing market. 

The new rules also mean that, beginning this tax year, all home sales must be reported to the Canada Revenue Agency. The gains from sales of primary residences will remain tax-free, but the government is aiming to block foreign buyers from purchasing and flipping homes while falsely claiming the primary residence exemption from capital gains tax.

Will it slow the housing boom or cause more of a housing shortage? This could have the opposite effect. Time will tell!