New Mortgage Rules as of December 15 , 2024

New Mortgage Rules in Canada: Key Changes Starting December 15, 2024

On December 15, 2024, Canada implemented significant changes to its mortgage rules, aimed at addressing rising housing costs, enhancing affordability, and ensuring the stability of the housing market. These new rules, introduced by the federal government and various financial regulatory bodies, affect homebuyers, homeowners, and lenders alike. In this article, we’ll break down the most important changes to the mortgage landscape and what they mean for Canadians.

1. New Stress Test Rules for Mortgage Applicants

One of the most significant changes that took effect on December 15 is the modification of the mortgage stress test. The stress test is designed to ensure that homebuyers can afford their mortgage payments even if interest rates rise. Under the previous rules, homebuyers were required to qualify for a mortgage at the higher of:

• The Bank of Canada’s five-year benchmark rate, or

• The contract rate plus 2%.

However, as of December 15, 2024, the new stress test rules stipulate that:

• Homebuyers must qualify at the greater of the Bank of Canada’s five-year benchmark rate or their contract rate plus 3%.

This change represents a 1% increase in the qualifying rate, which will likely have a significant impact on many homebuyers’ purchasing power. With interest rates remaining relatively high compared to historical norms, the change in the stress test criteria makes it harder for potential buyers to qualify for larger mortgages.

Impact on Homebuyers:

• Decreased Borrowing Power: The increase in the stress test rate means that many buyers will now qualify for a smaller loan compared to before, potentially making it harder to afford a more expensive property.

• Affordability Challenges: First-time homebuyers and those in expensive markets like Toronto, Vancouver, and Montreal may feel the pinch more acutely, as they now have less flexibility in terms of loan size.

Rationale Behind the Change:

• The government and the Office of the Superintendent of Financial Institutions (OSFI) implemented this change to further reduce the risk of buyers becoming financially strained in the event of future rate hikes. It also aims to help cool down overheated housing markets and ensure that homeowners can sustain their mortgage payments, even if rates increase.

2. Increased Minimum Down Payment for Expensive Properties

Another significant change that took effect on December 15 is the increase in the minimum down payment requirement for properties above a certain price threshold.

• New Rule: For properties priced above $1 million, the minimum down payment will now be 10% for the portion of the home price that exceeds $1 million, as opposed to the previous requirement of 5% for the entire price.

Example:

• Home Price: $1.5 million

• Old Rule: 5% down payment on the entire $1.5 million, which amounts to $75,000.

• New Rule: 5% down on the first $1 million ($50,000) + 10% down on the remaining $500,000 ($50,000) = $100,000 total down payment.

Impact on Homebuyers:

• Higher Initial Costs: Buyers of more expensive homes will now need to save more for their down payment, potentially pushing the dream of homeownership further out of reach for some Canadians.

• Slower Home Price Growth: The new down payment rules could slow down demand in the luxury real estate market by reducing the number of potential buyers who can afford larger homes or more expensive properties.

Rationale Behind the Change:

• The government’s objective with this change is to curb the growing risk associated with higher-priced properties, particularly in urban centres. Increasing the down payment requirement for luxury homes is expected to help manage housing market volatility and prevent buyers from overleveraging themselves.

3. New Limits on Mortgage Insurance

Starting December 15, 2024, Canada’s mortgage insurance rules also underwent changes. The Canada Mortgage and Housing Corporation (CMHC), as well as other insurers, introduced stricter limits on mortgage insurance eligibility for certain borrowers.

• Rule Change: Mortgage insurance will now only be available for properties worth up to $1.25 million, down from the previous cap of $1.5 million.

• Maximum Insurable Loan Amount: For properties valued above this threshold, buyers will need to put down at least 20% without the benefit of mortgage insurance.

Impact on Homebuyers:

• Less Access to Insurance: Buyers purchasing homes priced over $1.25 million may now be unable to obtain mortgage insurance unless they have a larger down payment, which could further increase their upfront costs.

• Increased Risk for Lenders: For borrowers purchasing homes above this value, the lack of mortgage insurance could result in higher-risk loans for lenders, potentially leading to higher interest rates.

Rationale Behind the Change:

• By reducing the availability of mortgage insurance on higher-priced homes, the government aims to reduce the overall risk in the housing market and make the system more sustainable in the long run. This change is also designed to ensure that borrowers with lower down payments are more likely to purchase homes they can afford.

4. Introduction of a First-Time Homebuyer Savings Account (FHSA)

In response to growing concerns about housing affordability, the federal government introduced a new initiative aimed at assisting first-time homebuyers. The First-Time Homebuyer Savings Account (FHSA), which launched on December 15, 2024, allows first-time buyers to save up to $40,000 tax-free for a down payment on a home.

• Contribution Limits: First-time homebuyers can contribute up to $8,000 per year, with a lifetime contribution limit of $40,000.

• Tax Benefits: Contributions to the FHSA are tax-deductible, and any capital gains from investments made within the account are also tax-free, similar to a Tax-Free Savings Account (TFSA).

Impact on First-Time Homebuyers:

• Improved Savings Opportunities: The FHSA offers first-time buyers a new, tax-advantaged way to save for a down payment. This could make it easier for Canadians to accumulate the funds needed to purchase their first home.

• Potential for Faster Homeownership: The ability to save more aggressively for a down payment, with tax breaks on contributions and capital gains, could help bridge the gap for many aspiring homeowners.

Rationale Behind the Change:

• The government introduced the FHSA to make homeownership more accessible for younger Canadians and first-time buyers, who have been disproportionately affected by rising home prices and rental costs. The FHSA is part of a broader effort to address housing affordability across the country.

5. Impact on the Housing Market

These new mortgage rules, while designed to protect buyers and lenders, are expected to have several effects on the housing market:

• Cooling of Housing Demand: Higher stress test requirements, larger down payment obligations, and restrictions on mortgage insurance for higher-priced homes will likely cool housing demand, particularly in overheated markets like Toronto and Vancouver.

• Price Stabilization: The impact of these changes could contribute to price stabilization or even a slight decline in home prices in some areas, especially in the luxury segment.

• Slower Market Activity: As homebuyers adjust to the new rules, fewer buyers may be able to enter the market or secure the homes they desire, potentially leading to lower competition in certain housing markets.

Conclusion

The new mortgage rules that came into effect on December 15, 2024, mark a significant shift in Canada’s approach to housing affordability and financial stability. With stricter stress test requirements, higher down payments for expensive properties, and the introduction of the FHSA, these measures are aimed at reducing financial risk for borrowers and ensuring a more sustainable housing market.

While these changes may make it harder for some Canadians to purchase homes, particularly in high-priced markets, they also provide new opportunities for first-time buyers and may help address long-term housing affordability challenges.

For prospective homebuyers, understanding these new rules is crucial to navigating the current market. Consulting with mortgage brokers and financial advisors will be key to making informed decisions in light of these changes.