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Changes to mortgage financing rules

The Federal Government has announced new measures to reinforce the Canadian housing finance system, which affect mortgage lending, and therefore are important to existing homeowners as well as potential home buyers.

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Mortgages greater than 80% of the property purchase price (‘high-ratio mortgage’)
Currently, lenders are federally regulated to obtain mortgage default insurance for homebuyers who make a down payment of less than 20% of the property purchase price. The homebuyer pays the premium for this insurance.

Additionally, the federal government has just announced new rules for high-ratio mortgages, as follows:

New ‘Stress Test’ to qualify for high-ratio mortgage – in effect 17 October 2016
Effective October 17, 2016, homebuyers requesting a new mortgage that is greater than 80% of the property value must qualify for the mortgage using the higher of two interest rates:

  1. The mortgage interest rate charged by the lender (‘contract mortgage rate’) or
  2. The Bank of Canada conventional five-year fixed posted mortgage rate (ie. most common occurring number of the conventional five-year fixed mortgage rates advertised by Canada’s six largest banks). This rate is typically higher than the contract mortgage rate.

To qualify for a high-ratio mortgage, the homebuyer must meet key debt-servicing ratios that factor in the amount of the mortgage payments. The amount of the mortgage payments depends on the mortgage interest rate.   By implementing this new measure, the federal government wants to ensure that the homebuyer will be able to continue to meet their debt obligations in the event of a rise in interest rates or a decrease in household income.

Homeowners with an existing high-ratio mortgage or those renewing existing high-ratio mortgages are not affected by this new measure.


Proposed changes to principal residence capital gains exemption
Currently, Canadian resident individuals and trusts can claim an exemption from capital gains taxation when disposing of their principal residence (‘principal residence exemption’). Families can designate only one property as the family’s principal residence for any given year.

The federal government has now announced proposed tax measures to ensure that the principal residence exemption is available only in appropriate cases and in a manner consistent with the Canadian resident and one-property-per-family limits, as follows:

  1. An individual who was not resident in Canada in the year the residence was acquired will not, upon disposition of the property after October 2, 2016, be able to claim the principal residence exemption.
  2. Trusts will only be able to designate a property as a principal residence for tax years that begins after 2016 if additional eligibility criteria is met.
  3. For tax years that end after October 2, 2016, Canada Revenue Agency (CRA) will require a taxpayer to report, on his income tax return, the disposition of a property for which the principal residence exemption is claimed.