The Government of Canada is considering imposing stricter rules on mortgages due to the nation’s seemingly overvalued housing market. Bank of Canada’s Governor, Mark Carney, and Finance Minister, Jim Flaherty, have been focused on the nation’s rising debt load for more than a year, stating that things must change in order to avoid serious economic repercussions. Ironically, instead of encountering a doomsday outcome, the Canadian real estate market has continued to boom as rates remain low and buyers maintain an optimistic outlook.
But Ottawa is still weary of trouble. Concerns about the possibility of an inflated housing market and the desire to crack down on consumer self-disclosure have the government discussing tighter regulations for condominium buyers and self-employed mortgage seekers.
Proposed Changes
Ottawa’s proposed changes are two-fold:
- Changing the Sale of Condominiums
Currently, condo buyers only need to prove that they can afford to take on the mortgage fee of the property. If the government has their way, new mortgage rules would also have to consider 100% of the condo fees associated with the property when assessing how much debt a consumer could safely afford. This is one change that the government is determined to see through – the same proposal was shelved last year (the new HELOC rules were instituted instead). - Abolishing Stated Incomes for Self-Employed Individuals
Stated income products are an extremely popular option for self-employed mortgage seekers. As it stands, the self-employed only need to supply a 20% down payment in order to avoid paying mortgage insurance through CMHC (Canada Housing and Mortgage Corporation). What’s more important is that self-employed individuals aren’t required to verify their income on a mortgage application. They are simply asked to state their income. Stated income products have been linked directly to the housing bust in the United States, providing low-income individuals with access to seemingly unlimited mortgage funds. By implementing a new set of self-employed borrowing measures, the Government of Canada is hoping to avoid similar problems.
What the Experts are Saying
When it comes to stricter rules for condo buyers, Toronto real estate broker and condo developer, Brad Lamb, says don’t hold your breath. Mr. Lamb was quoted in the National Post as saying “the condo market is hotĀ becauseĀ of investors not speculators.” And he’s right. Urban centres like Toronto and Vancouver are catering to wealthy investors, most of which are relocating to Canada from other nations. As Mr. Lamb stated, “these people are buying with cash.” Condo fees don’t even register on their financial radar.
Stated income products are a bit tricker. It’s very difficult to base a mortgage on the declared income of a self-employed individual because rarely is this number the truth. Folks who are self-employed have a tough time validating their ability to pay because they don’t have a notice of assessment. Right now, lenders focus on the spending behaviour of self-employed individuals, rather than income figures. With that being said, the government is still worried about marginal borrowers and is trying to take steps to prevent a breakdown similar to the one in the States.Ā The current Canadian labour market is roughly 13% self-employed, so changes to stated-income mortgages could have a major impact.
If you’re currently self-employed and seeking mortgage assistance, review our recent article How to Get a Mortgage When You’re Self-Employed. You can also receive a mortgage pre-approval online with help from the mortgage brokers at FamilyLending.ca.