Non-residents will no longer be able to avoid capital gains taxes on home sales by declaring them as their principal residences.
This is one of the changes announced October 3 by the federal government’s Minister of Finance Bill Morneau as part of new initiatives meant to cool housing markets in such cities as Vancouver and Toronto.
“This move, combined with B.C.’s new property tax on foreign buyers in Vancouver and the city’s proposed vacant-house tax rule, is aimed at slowing the flow of foreign wealth into hot markets,” BMO Capital Markets senior economist Sal Guatieri said in a note to investors. “It will discourage pure investment inflows to the housing market.”
In addition to this change, Morneau announced new rules surrounding mortgage insurance eligibility criteria. All new buyers requiring an insured mortgage will be subject to a “mortgage rate stress test,” which the government said is intended to make sure homeowners will be able to afford their mortgages even if interest rates go up.
“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,” the government said in a backgrounder document. “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.”
Guatieri said because the posted rate is often higher than the contract rate on mortgages with terms of five years or more, this measure will make it harder to qualify for a loan, particularly in regions with high prices. The difference between the posted and contract rates are often two percentage points higher on mortgages with terms of five years or more, he said.
“This means that many potential buyers won’t qualify for an insured mortgage, which requires the total carrying costs of a home—mortgage, insurance, property taxes and heating costs—to consumer no more than 39% of gross family income.”
Morneau also announced that mortgages that are insured with portfolio insurance, as well as low-ratio insured mortgages, have to meet the same criteria as for high-ratio mortgages to qualify. Buyers will need to have a minimum credit score of 600 and mortgages will need to have a maximum amortization period of 25 years.
“The government also plans to consult with housing market participants on a proposal that would see lenders share more of the risk on insured mortgages,” Guatieri said. “These measures could raise mortgage costs, thus damping home sales.
“[All 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.”
References: www.biv.com
