Earlier this week, Finance Minister Bill Morneau announced new, more stringent rules targeting foreign money entering the Canadian real estate scene, as well as ensuring that home buyers across Canada only borrow what they can afford to pay back.
These changes include an attempt to close loopholes in the tax laws that permit non-residents to purchase homes in Canada, and then receive a tax exemption to let them avoid paying capital gains upon reselling the house to a Canadian resident.
“Overall, I believe the housing market is sound, but as minister of finance, I want to make sure we are proactive in assessing and addressing the factors that could lead to excess risk,” Morneau said during the announcement.
The new rules are aimed to cool off the still-surging Vancouver and Toronto markets, which have been dominated by foreign buyers who have driven the average property asking prices significantly up.
With the implementation of the new rules, “an individual who was not a resident in Canada in the year the individual acquired a residence will not be able to claim the exemption for that year,” said Morneau.
Canadian residents who were legitimate residents at the time of purchase and at the time of sale of real estate property, however, will still be able to take advantage of the principal tax reduction.
According to Bob Aaron, a Toronto real estate lawyer, the new laws are a good step to preventing tax leakage.
“There’s a lot of people who are declaring their homes as principal residences when they’re not,” said Aaron. “I think it’s more of cracking down on the existing law rather than plugging a loophole.”
The new legislation also requires all insured mortgages to undergo a stress test to ensure that the borrower is still able to make their mortgage payments should the interest rate go up. Essentially, borrowers will be tested again the mortgage rates offered by the larger banks across Canada’s posted mortgage rates, which currently average at 4.64 percent according to the Bank of Canada.
Certain individuals applying for a mortgage are already required to undergo this sort of testing, such as home buyers putting down a down payment of less than 20 percent and home buyers who have a mortgage with a term of under five years. The new rules will be formally implemented on October 17 – with a big impact on potential home buyers.
These regulations will make it much more difficult for home buyers to qualify for a Toronto mortgage rates, particularly in high-priced areas.
For example, a potential home buyer with an annual income of $100,000 and $40,000 to put down on a house could qualify for a home worth $665,435 with an interest rate of 2.17 percent – which is a rate currently offered by three lenders in the country.
With the new rule, however, that same home buyer could only qualify to get a mortgage for a home worth $505,762 because they would be required to be tested to see if they could afford an interest rate that is double the rate they are trying to qualify for.
“This means that many potential buyers won’t qualify for an insured mortgage, which requires the total carrying costs of a home … to consume no more than 39 per cent of gross family income,” said Sal Guatieri, an economist with the Bank of Montreal.
“The measures announced today should help to reduce the risk of a housing market correction in Vancouver and Toronto and a broader retrenchment in Canadian household spending arising from elevated debts.”