One of the challenges of being a homeowner is the risk of taking of too much debt that ends up hurting you over the years. Many homeowners often find themselves in very tight positions and are forced to resort to options such as mortgage refinancing to be able to retain their homes. Luckily, things are about to change in the Canadian housing market. Ottawa recently unveiled a number of initiatives that aim at addressing the problem of debt load.
How Does It Work?
The initiatives put in place are meant to slow down the Canadian market. As such, foreign home purchase will be completely discouraged as the conditions set by the federal government will not favor such practices. This will mainly be achieved by closing a tax loophole. The two of the most pertinent initiatives that you are going to make a difference in the housing market include the “Stress Test” and the “Tax Loophole”. As you read on, you will see how the implementation of these two initiatives will impact the lives of homeowners in Canada.
Reports indicate that there has been a significant increase in competition in the Canadian housing market thanks to foreign markets. The new rules see to it that foreign home buyers are discouraged from acquiring homes in the country.
Most foreign home buyers actually relied on the tax loophole to make purchases. Since the tax loop hole will be closed and be unavailable to them, it will very difficult for them to purchase homes. The income tax system in Canada allows homeowners a significant income tax benefit. When they sell their homes, they are actually exempted from capital gains tax.
The exemption applies at the time of property sale and is based on a formulae contained in the Housing Act. Therefore, if a person is a non-resident at the time of property purchase in Canada, he will not benefit from the exemption of non-residency years according to the new rules.
The Stress Test
One of the significant changes in the housing market in Canada is the mortgage “Stress Test”. The test is going to apply to every insured mortgage. You may wonder what the “Stress Test” entails. Well, it is basically a measure as far as mortgage qualification is concerned. Consumers will be qualified on the Bank of Canada threshold rather than the existing contract rates. The rates of Bank of Canada are actually higher as compared to the contract rates.
Although the qualification is somewhat strenuous to consumers, it is actually meant to protect them from the unexpected and unfavorable rate fluctuations that could affect them financially in the future. Even if homeowners resort to mortgage refinancing in Mississauga, they will still be safe.
Effect of the Stress Test
The implementation of this policy will see a decline in the number of home buyers in the Canadian housing market. For instance, a significant number of first time home buyers put their hope on a five year fixed rate mortgage. This type of mortgage product allowed them to qualify for loans and gain access to the competitive market after some time. That means that a first time buyer who qualified for a $90,000 per year with zero debt and a down payment of 5% would be able to qualify for a home whose purchase price is over $400,000. With the new rules in place, a first time home buyer will only be eligible for a property whose value is roughly $350,000.
According to the “Stress Test”, a buyer will not be able to spend more than 39% of his income on mortgage expense, household bills and taxes. In addition, home buyers will not spend more than 45% of their income when all other debts are included.