How Will Relaxed Mortgage Rules Heat Up Toronto Real Estate?

Expect Toronto Real Estate Prices to Stay Hot

The Trudeau government is easing up on its mortgage lending rules to give home buyers more purchasing power, but real estate professionals feel that the changes will likely increase home prices in the Toronto housing market.

Since January 2018, potential home buyers making a down payment of less than 20 percent have been required to purchase Canadian Mortgage and Housing Corporation’s (CMHC’s) mortgage loan insurance. Individuals who qualified for the loan insurance without paying premiums had to “pass” a stress test that calculates whether or not a borrower could afford their mortgage at either the five-year average posted rate or two percent more than their actual mortgage rate – whichever is higher.

How Much More Will Borrowers Qualify For?

In reality, there’s more of a perceived gain than actual gain to the new stress test rules. For example, an individual with a $100,000 gross income, is only going to see a three percent gain in what they qualify for.

Today, a borrower would be stress tested at the posted rate, which is 5.19 percent. But borrowers are acquiring mortgages at around 2.89 percent. If you use that rate as the median with the new stress test rules, borrowers would only need to afford a rate of 4.89 percent. The difference is only 0.3 percent, making for a rather slight improvement on purchasing power. In borrowing terms, it means a home buyer could go from getting a $515,000 mortgage to $530,000.

The changes also only apply to insured mortgages for homes purchased at under $1 million. Homes over $1 million are still subject to the old stress test, but many professionals believe the new rules will be adopted for those larger purchases in time for spring. We don’t expect that the change will make a huge difference for million-dollar home sales.

What will probably happen is that prices in the housing market will just go up by a bit because everyone else who is bidding on real estate can afford more.

When the stress test was introduced in 2019 the condo market exploded. Condo prices went through the roof. In urban neighbourhoods, condo prices went up at a rate that exceeded that at which homes used to. Now that condo prices are at almost the same level as houses for similar square footage before maintenance fees, buyers are going back to buying houses, increasing the demand for houses again.

Real estate experts expect that the renewed appetite for houses in concert with the new stress test, competitive mortgage rates crawling down towards 2.6 percent and low supply will bring bidding wars back into the Toronto market.

In the near term, buyers who are in the real estate market will likely see little rate volatility. Given the current low level of rates and with markets fully priced for a rate cut from the Bank of Canada in July, there is limited scope for market rates to move significantly.

Rebates for Residential Properties

If you are purchasing a residential rental property in Toronto, you may qualify for either the New Residential Rental Property (NRRP) Rebate or New Housing GST/HST Rebate, depending on whether the property intended as an investment property or a principal residence.

For those individuals that purchase an investment property you will need to have a formal minimum one-year rental agreement (lease) in place before you can claim the NRRP Rebate. At the time of closing you will need to pay the applicable HST Rebate amount for the property and apply for the rental property rebate.

We recommend that our clients apply for their rebate application right after the property has closed and when a tenant has signed. Ensure that all rebate paperwork is proper and complete.

Understanding the various rebates and the CRA rules and regulations can be rewarding. At the same time, the application process can often be challenging and stressful. Connect with us and we can show you how a rebate expert can help you to maximize your rebate and help you navigate the rebate process.

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