By Martin K. I. Rumack

The federal government recently announced a significant change concerning guidelines for borrowers of high-ratio mortgages – a borrower who has a deposit of less than 20 per cent of the purchase price of a home.

Borrowers requiring mortgage default insurance must now meet the mortgage “stress test.” Essentially, a borrower must be able to carry a mortgage based on the then-current Bank of Canada rate for a five-year term, rather than be able to carry a mortgage at the financial institution’s advertised rate for a five-year mortgage. A borrower’s payment will be based on the actual rate charged by the financial institution for the mortgage, as set out in the mortgage commitment provided to the borrower.



These new requirements and guidelines do not affect homeowners with existing mortgages, or any new borrowers with pre-approval mortgage commitments that were already in existence prior to Oct. 17, 2016. These changes will also not affect individuals who are new borrowers, or existing homeowners who do not require a high-ratio mortgage when their current mortgage needs to be renewed.

However, homeowners who do have an existing high-ratio mortgage will have to meet the “stress test” guidelines at the time these mortgages are due for renewal; the exception is where the homeowner pays down the outstanding balance by an amount sufficient to bring the mortgage out of the “high-ratio” category.

For the past several years, lenders have restricted the amount of loans for investment properties to an amount not exceeding 80 per cent of the appraised value or purchase price, whichever is the lower amount. As a result, there have been a limited number of situations where default insurance has been required for the financing of investment properties. Co-ownerships and private equity co-operative mortgages/loans have never qualified for high-ratio mortgage default insurance, whether owner-occupied or investment rental. Therefore, mortgages on these kinds of properties are not affected by the regulatory changes.

In my opinion, these changes will likely affect the ability of some first-time home buyers to qualify for a mortgage. They may also lead to a decrease in the number of first-time home buyers, fewer bidding wars in hot markets and changes in the move-up market. Ultimately, this could lower the ridiculous prices many people have been paying in the last several years for properties in the Greater Toronto Area and other locales.

While presenting a seminar for the members of the Peterborough and the Kawarthas Association of Realtors recently, I learned that in the past several months, they have had bidding wars for homes for sale in their area. This change in the market has been occurring in other cities as well. Where next?

These changes will possibly result in more people looking for rental properties in which to live; this increase has already led to rental rate increases of approximately 10 per cent in some areas in the City of Toronto during the last year. I also have been advised of bidding wars now occurring even for rental properties.

In conjunction with fewer investors purchasing real estate for rental purposes in Toronto, we are seeing a noticeable increase in the number of new rental apartments being constructed by developers.  We have also seen a decrease in the number of condominium units being purchased by investors for rental purposes. Is this going to become the “new normal”?

Toronto lawyer Martin Rumack’s practice areas include real estate law, corporate and commercial law, wills, estates, powers of attorney, family law and civil litigation. He is co-author of Legal Responsibilities of Real Estate Agents, 4th Edition, available at the TREB bookstore and at LexisNexis. Visit Martin Rumack’s website.