The new Canadian federal budget and what it means for homebuyers
This year’s Canadian federal budget was released on March 22, and it included a number of changes that will affect homebuyers. Perhaps the most significant change is the increase to the minimum down payment for insured mortgages. As of now, all homebuyers who require mortgage insurance must put down at least 5% of the purchase price. This has been increased to 10%.
The budget also includes some changes to the way in which Canada Mortgage and Housing Corporation (CMHC) premiums are calculated. Beginning in April 2017, CMHC premiums will be based on the size of the mortgage, rather than on the amount of down payment made. This means that buyers with smaller down payments will pay more in premiums.
These changes are likely an attempt by the government to cool down Canada’s overheated housing market.
The government is tightening rules for mortgages
Ottawa is tightening rules for mortgages as part of efforts to cool the housing market and reduce taxpayer exposure to a potential downturn. Finance Minister Bill Morneau announced the changes in his first federal budget Tuesday. They include a new stress test for uninsured mortgages, designed to ensure that borrowers could still make payments if interest rates rise or their incomes fall. The new rules will take effect on April 19.
Morneau also said the government will increase the minimum down payment on homes costing more than $500,000 to 10 per cent from the current five per cent. And it will limit the ability of Canadians to borrow against their homes to 50 per cent of the value of their properties, down from 65 per cent currently.
The measures are aimed at making it harder for Canadians to take on too much debt and protect taxpayers in case of a housing market crash.
How these changes will impact the housing market
On Tuesday, March 22, 2016, the Federal Government of Canada tabled their annual budget. This year’s budget included a number of proposed changes that will impact the housing market.
The most significant change is the introduction of a new Home Buyers’ Tax Credit (HBTC). The HBTC will provide a tax credit of $5,000 for first-time home buyers who purchase a home worth up to $500,000. This credit will be available beginning in 2017 and is expected to help approximately 400,000 Canadians buy their first home.
Another change that could have an impact on the housing market is the increase to the minimum down payment for homes costing more than $500,000. The current minimum down payment is 5%, but this will be increased to 10% for homes costing more than $500,000.
The government is increasing taxes on foreign buyers
Yesterday the Federal government announced an increase in the taxes that foreign buyers must pay when purchasing a home in Canada. The new tax will be increased to 20% from the current rate of 15%. This is part of the government’s effort to cool down the housing market, which has been experiencing rapid growth in prices in recent years.
The new tax will apply to all foreign buyers, regardless of nationality. It will go into effect on August 2nd, 2017. Minister of Finance Bill Morneau said that the government is targeting speculators who are not contributing to the economy and are instead driving up prices for Canadian residents.
Some have questioned whether this measure will be effective in cooling down the housing market. Others have warned that it could lead to a slowdown in investment and immigration into Canada.
How these changes could impact the economy as a whole
The Federal government of Canada has announced changes to the taxation system in its upcoming budget. These changes will impact individuals and businesses in a number of ways, with the goal of increasing revenue from taxes. While it is too early to know the full extent of the changes, there are some potential implications for the economy as a whole.
One change that could have an impact is the increase in the marginal tax rate for high-income earners. This could dampen investment and entrepreneurship, as people may be less likely to take risks if they know they will be taxed more heavily on any profits. Additionally, the reduction in deductions and credits available may also lead to less spending by individuals and businesses. This could slow economic growth overall.
It is also worth noting that Canada’s economy is closely tied to that of the United States.
What to expect from the new budget and how it will affect homebuyers
The federal government has earmarked more than $10 billion in new spending for housing-related initiatives, much of which is focused on increasing supply.
Overall, the federal budget includes $56 billion in new spending over the coming years and will result in a projected deficit of $52.8 billion for the 2021-22 fiscal year.
In terms of housing initiatives, the budget delivers on a number of Liberal Party campaign promises made during the last election, with one notable exception. Absent was the proposal to increase the insured mortgage cut-off from $1 million to $1.25 million.
The $10 billion in housing-related spending over the next five years includes:
- $4 billion for a new Housing Accelerator Fund. The fund will target the creation of 100,000 net new housing units over five years.
“The fund will be designed to be flexible to the needs and realities of cities and communities, and could include support such as an annual per-door incentive for municipalities, or up- front funding for investments in municipal housing planning and delivery processes that will speed up housing development,” the budget states.
- $475 million for a one-time payment to those facing housing affordability challenges. Although no specifics were included in the budget, the budget provides a one-time payment of $500 for those struggling with housing costs.
- Introduction of the Tax-Free First Home Savings Account. This will allow prospective homebuyers to save up to $40,000 in the account, with all contributions being tax-deductible and withdrawals to purchase a home being tax-free.
- Doubling the First-Time Home Buyers’ Tax Credit amount to $10,000. This works out to a benefit of up to $1,500for the homebuyer.
- Changes to the First-Time Home Buyer Incentive. The budget extends the $1.25 billion First-Time Home Buyer Incentive program to March 31, 2025. The program, administered by the Canada Mortgage and Housing Corporation (CMHC), was originally slated to expire this September. The government added that it’s exploring options to make the program “more flexible and responsive” to the needs of first-time buyers. Figures reported this week show that as of December, the government has approved just $270 million in shared-equity mortgages.
The government also introduced several measures it says will strengthen the integrity of the housing market and address foreign investment, property flipping and speculation.
A ban on foreign investment
The government plans to prohibit those who are not Canadian citizens or permanent residents from purchasing non-recreational residential property in Canada for a period of two years.
Crackdown on property flipping
New rules will be introduced that would subject any buyer who sells a property held for less than 12 months to full taxation on their profit as business income. Exemptions would be made for certain life circumstances, such as death, disability, the birth of a child, a new job or divorce.
Taxing assignment sales
The government will move forward with a plan to make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST/HST purposes, effective May 7, 2022.
An end to blind bidding
The government will follow through with its election promise to end the practice of blind bidding as part of the development of a Home Buyers’ Bill of Rights. The budget outlines that this bill could also include ensuring a legal right to a home inspection and ensuring transparency on the history of sale prices on title searches.
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