Blog Post

Creating Stability in the Canadian Housing Market

Katherine Martin • Oct 03, 2016

This morning, Finance Minister Bill Morneau announced new housing measures, changes meant to alleviate risk in Canada’s current housing market. The measures include:

Standardizing lending criteria for high- and low-ratio mortgages, including a mortgage stress test
Closing tax loopholes for capital gains exemptions on principal residence sales
Consulting with industry stakeholders to ensure risk is properly distributed.

It is good to note that these changes will not have any impact on existing mortgage holders, they will be applied going forward.

“Canadians have told us they are concerned about growing household debt and rapidly rising house prices in some of our biggest cities, particularly in markets like Toronto and Vancouver. These concerns have grown over many years, and there are no quick fixes. The federal government plays an important role in ensuring that housing markets are stable and function efficiently. My colleagues and I are committed to continuing to work with provinces and municipalities to address the concerns of middle class families, and to ensure Canada’s housing markets and financial system remain strong, stable and resilient well into the future.”

– Bill Morneau, Minister of Finance

During his press conference, the Finance Minister said repeatedly that he believes the housing market is stable, and that these are simply preventative measures. Over the next week there will be more information available about the specifics of what this announcement means, and that will be shared here, however in the mean time, here is the announcement from the government found on the Department of Finance website.

Backgrounder: Ensuring a Stable Housing Market for All Canadians

Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it. Recognizing that for many families, their homes are their most important asset, the Government is taking preventative measures today to ensure a healthy, competitive and stable housing market for all Canadians.

Today’s actions recognize the effect that years of low interest rates and shifting attitudes towards debt and indebtedness have had on the housing market. While the overall Canadian housing market is sound, house prices have risen significantly in some markets, notably Toronto and Vancouver, and some borrowers are taking on high levels of debt. In these circumstances, it is important to ensure that these debt levels are sustainable, that lenders are acting prudently, and that financial stability risks do not arise in the event of increases in interest rates or a housing market downturn.

The Minister of Finance has been actively engaged on the housing file. One of the Government’s first steps since being elected nearly a year ago was to address pockets of risk in the housing market by raising the minimum down payment for homes priced above $500,000. Since then, Department of Finance Canada officials have been further studying the housing market, and have led a working group with municipalities and provinces, as well as federal agencies such as the Office of the Superintendent of Financial Institutions and Canada Mortgage and Housing Corporation.

This in-depth analysis, informed by the productive dialogue with our partners, has informed today’s announcement of three complementary measures designed to reinforce the Canadian housing finance system, to help protect the long-term financial security of borrowers, and to improve tax fairness for Canadian homeowners. Analysis and cooperation are ongoing as the Government continues to carefully monitor the situation.

1. Bringing Consistency to Insured Mortgage Rules

“Mortgage rate stress test” for all insured borrowers:

To help ensure new homeowners can afford their mortgages even when interest rates begin to rise, mortgage insurance rules require in some cases that lenders “stress test” a borrower’s ability to make their mortgage payments at a higher interest rate. Currently, this requirement only applies to a subset of insured mortgages with variable interest rates or fixed interest rates with terms less than five years. Effective October 17, 2016, this requirement will apply to all insured mortgages , including fixed-rate mortgages with terms of five years and more. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.

Safer lending:

There are currently different rules in place depending on what proportion of the value of the property is covered by a loan. For example, mortgage insurance criteria for a loan that represents 80 per cent of the value of the property or less ( low loan-to-value ratio mortgages) are not as stringent as for high loan-to-value ratio mortgages (loans that represent more than 80 per cent of the value of the property). This could lead to increased risk for the taxpayers who ultimately back insured mortgages. To help ensure that taxpayer support for mortgage funding is targeted towards safer lending, effective November 30, 2016, mortgages insured by lenders through portfolio insurance and other low loan-to-value ratio mortgage insurance must meet the same loan eligibility criteria as high loan-to-value insured mortgages.

2. Improving Tax Fairness and Closing Loopholes

The Government is committed to tax fairness, and to ensuring that the exemption from capital gains tax on the sale of a principal residence is available only in appropriate cases. Proposed changes to the tax rules would ensure that the principal residence capital gains exemption is not abused, including by non-residents buying and selling a property in the same year. An additional measure would improve compliance and administration of the tax system with respect to dispositions of real estate, including the sale of a principal residence.

3. Managing Risk and Protecting Taxpayers

The Government continuously monitors the housing market and is committed to implementing policy measures that maintain a healthy, competitive and stable housing market. As a part of this effort, the Government is looking at whether the distribution of risk in Canada’s housing finance system is balanced, and appropriately reflects all parties’ abilities to share in the management of housing risks.

To this end, the Government will launch a consultation process with market participants this fall on lender risk sharing, a potential policy option that would require mortgage lenders to manage a portion of loan losses on insured mortgages that default. Currently, lenders are able to transfer virtually all of the risk of insured mortgages to mortgage insurers, and indirectly to taxpayers through the government guarantee.

If you have any questions about what any of this means, please don’t hesitate to contact me anytime!

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Katherine Martin

Origin Mortgages

Phone: 1-604-454-0843
Email: kmartin@planmymortgage.ca
Fax: 1-604-454-0842

Understanding a Spousal Buyout Mortgage

By Katherine Martin • 08 May, 2024

If you’re going through or considering a divorce or separation, you might not be aware that there are mortgage products designed to allow you to refinance your property and buy out your ex-spouse. If you’re like most people, your property is your most significant asset and is where most of your equity is tied up. If this is the case, it’s possible to structure a new mortgage that allows you to purchase the property from your ex-spouse for up to 95% of the property’s value. Alternatively, if your ex-spouse wants to keep the property, they can buy you out using the same program. It’s called the spousal buyout program. Here are some of the common questions people have about the program. Is a finalized separation agreement required? Yes. To qualify, you’ll need to provide the lender with a copy of the signed separation agreement, which clearly outlines asset allocation. Can the net proceeds be used for home renovations or pay off loans? No. The net proceeds can only buy out the other owner’s share of equity and/or pay off joint debt as explicitly agreed upon in the finalized separation agreement. What is the maximum amount that you can access through the program? The maximum equity you can withdraw is the amount agreed upon in the separation agreement to buy out the other owner’s share of the property and/or retire joint debts (if any), not exceeding 95% loan to value. What is the maximum permitted loan to value? The maximum loan to value is the lesser of 95% or the remaining mortgage + the equity required to buy out other owner and/or pay off joint debt (which, in some cases, can total < 95% LTV. The property must be the primary owner-occupied residence. Do all parties have to be on title? Yes. All parties to the transaction have to be current registered owners on title. Your solicitor will be required to confirm this with a title search. Do the parties have to be a married or common-law couple? No. Not only will the spousal buyout program support married and common-law couples who are divorcing or separating, but it’s also designed for friends or siblings who need an exit from a mortgage. The lender can consider this on an exception basis with insurer approval. In this case, as there won’t be a separation agreement, a standard clause will need to be included in the purchase contract to outline the buyout. Is a full appraisal required? Yes. When considering this type of mortgage, a physical appraisal of the property is required as part of the necessary documents to finalize the transaction. While this is a good start to answering some of the questions you might have about getting a mortgage to help you through a marital breakdown, it’s certainly not comprehensive. When you work with an independent mortgage professional, not only do you get a choice between lenders and considerably more mortgage options, but you get the unbiased mortgage advice to ensure you understand all your options and get the right mortgage for you. Please connect anytime; it would be a pleasure to discuss your needs directly and provide you with options to help you secure the best mortgage financing available. Also, please be assured that all communication will be held in the strictest of confidence.

Why Downpayment Source Matters

By Katherine Martin • 01 May, 2024

If you’re looking to purchase a property, although you might not think it matters too much, the source of your downpayment means a great deal to the lender. Let’s discuss the lender requirements, what your downpayment tells the lender about your financial situation, a how downpayment helps establish the mortgage loan to value. Anti-money laundering Lenders care about your downpayment source because, legally, they have to. To prevent money laundering, lenders have to document the source of the downpayment on every home purchase. Acceptable forms of downpayment are money from your resources, borrowed funds through an insured program called the FlexDown, or money you receive as a gift from an immediate family member. To prove the funds are from your resources and not laundered money from the proceeds of crime, you’ll be required to provide bank statements showing the money has been in your account for at least 90 days or that you’ve accumulated the funds through payroll deposits or other acceptable means. Now, if you’re borrowing all or part of your downpayment, you’ll need to include the costs of carrying the payments on the borrowed downpayment in your debt service ratios. If you’re the recipient of a gift from a direct family member, you’ll need to provide a signed gift letter indicating that the funds are a true gift and have no schedule for repayment. From there, you’ll need to show the money deposit into your account. Financial suitability Lenders care about the source of the downpayment because it is an indicator that you are financially able to purchase the property. Showing the lender that your downpayment is coming from your resources is the best. This demonstrates that you have positive cash flow and that you’re able to save money and manage your finances in a way that indicates you’ll most likely make your mortgage payments on time. If your downpayment is borrowed or from a gift, there’s a chance that they’ll want to scrutinize the rest of your application more closely. The bigger your downpayment, the better, well, as far as the lender is concerned. The way they see it, there is a direct correlation between how much money you have as equity to the likelihood you will or won’t default on their mortgage. Essentially, the more equity you have, the less likely you will walk away from the mortgage, which lessens their risk. Downpayment establishes the loan to value (LTV) Thirdly, your downpayment establishes the loan to value ratio. The loan to value ratio or LTV is the percentage of the property’s value compared to the mortgage amount. In Canada, a lender cannot lend more than 95% of a property’s value. So, if you’re buying a home for $400k, the lender can lend $380k, and you’re responsible for coming up with 5%, $ 20k in this situation. But you might be asking yourself, how does the source of the downpayment impact LTV? Great question, and to answer this, we have to look at how to establish property value. Simply put, something is worth what someone is willing to pay for it and what someone is willing to sell it for. Of course, within reason, having no external factors coming into play. When dealing with real estate, an appraisal of the property will include comparisons of what other people have agreed to pay for similar properties in the past. You’ll often hear of situations where buyers and sellers try to inflate the sale price to help finalize the transaction artificially. Any scenario where the buyer isn’t coming up with all of the money for the downpayment, independent of the seller, impacts the LTV. All details of a real estate transaction purchase and sale have to be disclosed to the lender. If there’s any money transferring behind the scenes, this impacts the LTV, and the lender won’t proceed with financing. Non-disclosure to the lender is mortgage fraud. So there you have it; hopefully, this provides context to why lenders ask for documents to prove the source of your downpayment. If you’d like to talk about mortgage financing, please connect anytime; it would be a pleasure to work with you.