The Government Taketh and The Government Giveth

This week was one full of financial related news from the Federal Government. Some positive, some perhaps not.

The Taketh

  • The worst kept secret is now no longer such. Effective Jan 1, 2018 the Office of the Superintendent of Financial Institutions (OSFI), the federal crown corporation that regulates all chartered banks, will require lenders to “stress test” all mortgages, regardless of the down payment.
  • This new regulation will affect all borrowers.
  • The new rules will require buyers to demonstrate they could still afford their mortgage payments if interest rates were 2% higher than the actual rate they negotiate.This effectively reduces the amount borrowers will qualify for by 20%, a significant amount by any stretch of the imagination.
  • Potential home-buyers will either need to lower their purchase price expectations, come up with more down payment, utilize the “bank of mom and dad”, or obtain a co-signer.
  • Currently, purchasers with less than 20% down payment already face very similar rules.

As an example, a client could negotiate a 5 year fixed rate of 3.09% however the lender will need to base their approval on the client’s ability to qualify at a rate of 5.09%. On a $500,000 mortgage the client would need to “have the ability” to pay an extra $568 per month. In reality, prospective purchasers who want to borrow at the maximum threshold will need to reduce the amount they borrow so their new mortgage payments are $568 less, in this example, which is roughly equal to $100,000. For those clients who are not approaching their upper borrowing limits, the new rules will have little impact.

Many banking and real estate industry leaders speculate that this latest move by the government will slow down housing activity modestly in 2018 as consumers adjust to the new lending environment. There is no doubt that this rule is likely the most significant to be introduced in years and designed to reduce the perceived risk in the banking sector with household debt at record highs, along with the price of housing in many major cities. Only time will tell. One thing is for certain; this will not help improve affordability. Unfortunately, any rules that could help affordability would likely need to come at the expense of managing mortgage risks.

The Giveth

The federal government announced plans to honor its election promise of reducing the small business tax rate. Furthermore, after ongoing pressure from small businesses, medical professionals and other incorporated professionals, the government has now softened its approach to taxing passive income held in a corporation. This is welcomed news for many self-employed Canadians who were concerned about the adversarial and arbitrary taxation announcements from Ottawa. Some highlights:

  • All past investments and the income earned from those investments will be protected
  • Businesses can continue to save for contingencies or future investments in growth
  • A $50,000 threshold on passive income in a year (equivalent to $1 million in savings, based on a nominal 5-per-cent rate of return) – an amount that is exceeded by only about 3 per cent of corporations – is available to provide more flexibility for business owners to hold savings for multiple purposes, including savings that can later be used for personal benefits such as sick-leave, maternity or parental leave, or retirement.

So, while mortgages are increasingly harder to qualify for, perhaps business owners can now come up with a larger down payment to afford their dream home.

We work with many lenders who will not be affected by these upcoming changes. If I can help answer any questions please do not hesitate to contact me.