Ottawa tightens mortgage rules

par Andrew Rickard | October 04 2016 01:30PM

Bill Morneau

Yesterday afternoon, Federal Minister of Finance Bill Morneau announced a number of preventative measures that are meant to keep the Canadian housing market “competitive and stable”. All borrowers with a down payment of less than 20% will now have to qualify for mortgage insurance using an interest rate of at least 4.64%.

Legislation requires all federally-regulated lenders to obtain mortgage default insurance for people who put down less than 20% of the purchase price. Starting on October 17, all homebuyers who need mortgage insurance will have to qualify using an interest rate that is the greater of either their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate (which is currently 4.64%). This requirement was already in place for high-ratio insured mortgages with variable rates or fixed rates with terms of less than five years.

If a lender wishes to insure the mortgage of someone who has put down more than 20%, they too will face more stringent criteria effective November 30, including a maximum amortization length of 25 years, a maximum property purchase price of $1,000,000, a minimum credit score of 600, and a maximum Gross Debt Service ratio of 39% and a maximum Total Debt Service ratio of 44%, also calculated by applying the greater of the mortgage rate or the Bank of Canada conventional five-year fixed posted rate.

More stringent criteria effective November 30

In addition, the government closing some housing-related tax loopholes. For example, after this year trusts will only be able to designate a property as a principal residence if they are able to meet additional eligibility criteria.

"A trust will be required to be — in each year that begins after 2016 for which the designation applies — a spousal or common-law partner trust, an alter ego trust (or a similar trust for the exclusive benefit of the settlor during the settlor’s lifetime), a qualifying disability trust, or a trust for the benefit of a minor child of deceased parents," reads the backgrounder. "In addition, the trust’s beneficiary who, or whose family member, occupies the residence for the year will be required to be resident in Canada in the year, and will be required to be a family member of the individual who creates the trust."

These are only some highlights from the changes. The complete technical backgrounder is available on the Department of Finance Canada web site.