One of Canada’s largest mortgage default insurers says about one third of its consumers would have problems meeting the new required debt service ratios unveiled by Ottawa Monday and could ultimately be forced into lower priced houses.
Finance Minister Bill Morneau unveiled plans that would force all insured borrowers to qualify for loans based on the posted rate for a five-year rate mortgage, now 4.64 per cent. Consumers with locked-in rates for five years or more have previously been able to use the rate on their contract — as low as 2.17 per cent, according to ratehub.ca — and ultimately qualify for more loan. The rules also apply to low-ratio loans (those with a down payment of more than 20 per cent), if those loans are put in a government-backed securitized program.
The rate qualification is not the only change. Other key measures that would affect all insured mortgages include a maximum amortization of 25 years, a maximum purchase price below $1 million, only owner-occupied properties being eligible and a total debt service ratio of 44 per cent at the time a loan is approved.
New consumers unable to meet those requirements could be shut out of the market, but even consumers with existing mortgages might be unable to easily switch lenders, leaving them with little ability to negotiate and a higher real interest rate.
McLister said non-bank lenders, which mostly securitize their loans with government backing, could see a steep reduction in business. The government said preliminary estimates are that eight per cent of buyers will be impacted, but McLister said lenders he’s spoken to say it’s likely closer to 40 per cent. Genworth stock finished down 8.7 per cent Tuesday after it disclosed how its business would be impacted.
Ottawa’s move to tighten lending rules was coupled with new requirements to close loopholes it says some buyers were using to avoid paying capital gains tax on the sale of a principal residence, which is not available to non-residents. Beginning with 2016, individuals will have to report in their income tax return the sale of a property for which they claim the principal residence exemption.
The move was believe to be largely aimed at reports of foreign buyers driving up prices in Vancouver, something that led the provincial government in British Columbia to begin imposing an additional 15 per cent property transfer tax on foreign buyers in August.
Derek Holt, vice-president at Scotiabank Economics, said the new rules could mean foreign investors could be looking at 25 per recent reduction in their investments.
But Kevyn Nightingale, an internal tax partner at MNP LLP, said the so-called tightening up a of the loophole is more about “appearing to do something than actually doing something” and will have little impact on the market.
“When you’re a foreigner and you sell a piece of Canadian real estate, what goes into every purchase of sale document (is a statement) that says ‘I hereby certify that I am not a non-resident of Canada for income tax purposes,’” Nightingale said, adding that if the seller doesn’t disclose that then the buyer must withhold 25 per cent of payment and remit it to the Canada Revenue Agency. “This (new rule) is aimed at those Chinese investors in Vancouver. In some cases, it is out and out evasion where people lie on forms. What is more common is a (foreign resident) puts his family into a home into Vancouver and either loans or makes a gift to one of the family members to buy the property and they actually live here. It won’t change this at all for that person.”
Paul Hickey, a tax partner at KPMG, said the new rules will create a rich database of everybody who sold their principal residence. There’s a penalty for not disclosing it and a forfeiture of the tax break if it’s later found out you didn’t reveal a sale.
“They’ll be able to do some matching and say ‘you’re a contractor, you’re a real estate agent,’ ” he said. “They are going to be able to mine that data. If you buy and sell three houses in three years, that’s going to show you are very active.”
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