House sold before new mortgage rules changes came into effect Oct. 17.

New mortgage rules raising bar

Government taking action to cool off Toronto's housing market

New federal mortgage rules that came into effect on Monday may leave many first-time homebuyers in the dust.

“It removes a lot of first-time homebuyers in the sense that the mortgage value they were able to take on before has now dropped about 20 per cent,” said Darin Bauer, a broker at Mortgage Intelligence in Toronto.

The new rules involve a stress test for buyers taking out an insured mortgage with less than 20 per cent down payment. The goal is to ensure that the borrowers will still be able to repay their loan if the interest rate increases at renewal.

The government is trying to contain household debt and stabilize the overheated housing market by indirectly cutting into the homebuyers’ purchasing power.

The stress test calculates the borrower’s ability to make their payments based on a benchmark qualifying rate of 4.64 per cent, which is much higher than a realistic mortgage rate. BMO has a five-year fixed rate posted at 2.59 per cent.

Before Monday, stress tests were not mandatory for fixed-rate mortgages of five years or more.

This change affects lower-income first-time buyers the most, as they may not have the equity to pay more of the house up front.

Toronto’s housing prices have seen rapid increase in the past few years. By making it harder to get a mortgage, demand for housing decreases, causing the prices to increase at a slower rate or drop.

“It’s good to have first time buyers stress-tested for future rate increases,” Bauer said. “But at the same time, if you’re worried about an overheated market, you have to look at what else is overheating it, and there’s a lot of foreign money coming into the Toronto housing market.”

The government is also closing a tax loophole that some foreign buyers were using to avoid paying capital tax gains on investment properties they falsely claimed as their primary residences.