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In-law Suites: What Are They and What You Need to Know

Finance Minister Bill Morneau introduced new rules on October 3, 2016, aimed at restricting the flow of foreign money into Canadian real estate, and introducing stricter requirements for borrowers so that they only take on mortgages they can afford.

Minister Morneau Announces Preventative Measures for a Healthy, Competitive and Stable Housing Market

Principle Residence Tax Exemption

In Canada, homeowners do not pay capital gains tax (taxes on the increase in value of the home) on their principal residence. Under the new rules, the principal residence exemption will only be available where a homeowner (or spouse or children) live in the home at some time during the year that the exemption is claimed. Now, the exemption can only be claimed by a Canadian resident, closing a loop-hole where non-residents buy homes in Canada and attempt to claim the exemption.

Insured Mortgages – Stress Test

Starting on October 17, 2016, all borrowers on insured mortgages with fixed-rate terms of five years or longer, will have to establish that they can make mortgage payments at a higher interest rate than the contract rate. Under the new “stress test” such borrowers will have to establish that they have the ability to pay their mortgage as if their actual rate was as high as the Bank of Canada five year posted rate (currently 4.64%).

This CBC article illustrates the impact on buyers:

According to interest rate-comparing website RateHub, a hypothetical borrower with $100,000 in annual income and $40,000 to put down on a house today could qualify for a house worth $665,435 with a mortgage at 2.17 per cent, which three lenders are currently offering, according to the site.

But under the new rules, that same buyer could only qualify to buy a home for $505,762, or 24 per cent less than before the rules kick in. The lender is still willing to offer that lower rate, but the borrower would no longer be allowed to get it under the stricter rules, because his or her finances would be tested as though the mortgage rate is more than twice as high as it is in reality.

Anyone that already has a mortgage or has already applied for mortgage insurance, will be exempt from this new rule.

Please contact us, if you have any questions about these new rules.