Canada's Condominium Magazine

How to make mortgages more expensive without raising rates

The new measures announced by the minister of finance today aimed at preventing further overheating in the housing market will make it harder for some Canadians to get a mortgage. That is what Bill Morneau was referring to when he said that some are taking on high levels of debt “in a rush to buy before it is too late.” Many Canadians who qualify for a mortgage of a certain size today will find that they qualify for considerably less when the measures take effect.

He is achieving this without the big blunt weapon of a general rate increase. Instead, from now on all home buyers with insured mortgages must undergo a stress test that demonstrates their ability to make their mortgage payments even if the mortgage were at a significantly higher rate. The rate to be used is the posted rate of the five big banks, currently at 4.54 per cent.

While banks may still advertise rates of less than half that amount, the customer will have to qualify for the higher rate. Under present conditions, a buyer could qualify for a mortgage to buy a home worth $750,000 with a rate of 2.17 per cent, depending on household income and other factors; however, that same buyer could qualify for much less house under the new requirements as of October 17. Monthly payments calculated at stress test levels could be hundreds of dollars per month higher. And with fewer homebuyers qualifying for a CMHC-insured home mortgage, the government achieves its goal of reducing risk to the taxpayer.

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My view is that the Canadian housing market is stable. The measures we’re taking today are intended to ensure long-term stability in the market.

The other important measure Morneau announced concerns “tax fairness,” by which the government means that only those who qualify for a tax break should get one. In this case, the tax break is in the form of a capital gains tax exemption enjoyed by sellers of Canadian property even if they are non-residents. The new measure would not allow an individual who was not a resident of Canada to purchase and sell property in the same year while claiming the capital gains tax exemption. That exemption is intended only for Canadian residents who dispose of their principal residence. From now on, those Canadians who sell a property for which the principal residence exemption is claimed will have to report it in the income tax return for that year.

At present, it is not known how widespread this practice is because it is not well known how many buyers of residential real estate in Toronto are non-Canadian. There have been reports, however, of non-residents buying properties in Canada for the use of family members who are Canadian residents, then selling the properties tax-free.

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