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New Housing Reforms: Some confusion

Oct 29, 2016

The new housing reforms initiated by Ottawa effective October 17 have been confusing. Many prospective homeowners were receiving conflicting advice from realtors, lenders and brokers.

The original rules were ambiguous but the confusion is abating.

As of Monday Oct. 17, any buyer who does not make a minimum 20 per-cent down payment will have to qualify for a mortgage using the Bank of Canada’s conventional five year fixed rate, which is about double the rate offered by other lenders. This is referred to as a stress test. Even though the borrower doesn’t have to pay the higher rate it will reduce the amount of mortgage they can get. Buyers are required to purchase mortgage default insurance if they borrow more than 80% of the purchase price.

As things have changed most lenders can use their discretion. The federal government had initially two sets of rules including different criteria from Oct. 3 when the changes were announced until Oct. 17. Now all those rules between those dates are exempt if the borrowers had signed a legally binding purchase agreement. Even though a buyer is exempt from the rules the banks may decide to stress test for internal policy reasons. Homeowners who are renewing or switching an insured mortgage to another lender would not have to be stress tested.

The government also made new rules for portfolio insurance, bulk insurance for low- risk loans. The Finance Department has stated the mortgage insurers are responsible for determining whether a loan qualifies for an exception in specific circumstances. The reforms are designed to ensure Canadians can manage their debt loads and the concerns about Toronto and Vancouver real estate values that have soared. The industry believes the reforms will not cool the hottest markets because there are few properties listed for sale.