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The Major Change in Mortgage Rules in 2018

The Major Change in Mortgage Rules in 2018

The purpose of this blog is to explain in a simple manner what the newly introduced stress test on uninsured mortgages mean. The many aspects of a mortgage are not addressed in this blog and the reader is advised to contact me directly or other mortgage professionals in the industry to inquire about the specifics of their situation and needs. Feel free to send your questions via the comments section of this blog.


Background:
OSFI (the Office of the Superintendent of Financial Institutions) published the final version of guideline B-20 (Residential Mortgage Underwriting Practices and Procedures) last October which comes into effect on January 1st, 2018 and applies to ALL federally regulated financial institutions. OSFI regulates 382 institutions between Banks, Trust Companies, Loan Companies, Life Insurance Companies, Federal Benefit Societies and Property and Casualty Insurance Companies.

The most talked about change in the mortgage industry to be implemented in 2018 is setting a new minimum qualifying rate or what is referred to as “stress test” for uninsured mortgages.

Insured vs. Uninsured Mortgages:
At the moment, a buyer who is paying 20% or more to purchase a residential property will not be subject to a “Stress test”, except in specific circumstances, or required to buy mortgage insurance. Such a loan is uninsured.

A buyer who is paying less than 20% to purchase a residential property has to undergo a stress test AND buy mortgage insurance. Therefore, the loan becomes insured

Effective Jan 2018, everyone applying for a mortgage through one of the federally regulated institutions will undergo a stress test. The most affected category are those paying 20% or more in down-payment AND applying for a fixed rate, 5-years term or more mortgage. This category of buyers/borrowers does not have to undergo a stress test as of today.


Lets look at some numbers in an example (the numbers below are estimates and are for indication purposes only – the reader is advised to consult with mortgage professionals for a proper calculation as it relates to the reader situation):

Scenario (1)
12

This example demonstrates that the family profile above might be able to get approved for a loan of $1,200,000 today but will only be able to secure $875,000 after Jan 2018 noting the assumptions above. It is important to remember that if the family was never interested in a $1,500,000 property and was only looking for a $1,000,000 – $1,200,000 property then nothing really will affect them.

Assumptions:
– The offered Mortgage from the lender is at a rate of 3.25% and 30 years amortisation.
– The stress test is based on 5.25% and 25 years amortisation.


Scenario (2)
12

This example demonstrates that the family profile above might be able to get approved for a loan of $720,000 today but will only be able to secure $520,000 after Jan 2018 noting the assumptions above. It is important to remember that if the family was never interested in a $900,000 property and was only looking for a $650,000 – $700,000 property then nothing really will affect them.

Assumptions:
– The offered Mortgage from the lender is at a rate of 3.25% and 30 years amortisation.
– The stress test is based on 5.25% and 25 years amortisation.


What is the logic behind the “stress test”?
Simply put, to test if the borrower is able to pay the mortgage if the lending rates increase by ensuring that the debt is still within reasonable range or ratio to the borrower’s gross income with the applied high rate.

Why do some argue that it does not make sense to apply it to uninsured mortgages?
At the moment, the stress test is required in certain situations, the most common two are:

  1. When a buyer/borrower is applying for a variable rate mortgage. In this situation, it is understandable why a stress test is required since the buyer/borrower is exposed directly and immediately to any changes in rates in the marketplace and hence the lender needs some sort of assurance that the buyer/borrower is able to fulfil his/her mortgage obligations if this happens.
  2. When a buyer/borrower is paying less than 20% down payment. In this situation, it is somewhat understandable why a stress test is required. Remember that this type of mortgage is insured. So the lender and the insurer are exposed to the possibility of the buyer/borrower defaulting and the lender not being able to recover the loan amount from selling the property (especially that the loan amount compared to the property value is high – High LTV or Loan-to-Value) . The stress test should give an indication to both the lender and insurer that although the buyer/borrower is not able to or chose not to pay 20% or more as down payment, the borrower is able to comfortably fulfil his/her mortgage obligations.

There are other situations where the stress test is also required but the above are the most common ones.

Contrary to the above, the most common situation where a stress test is not required is when a buyer/borrower applies for a Fixed Rate, 5-years or more term mortgage. Some argue that such a buyer/borrower SHOULD NOT be subject to a stress test. Such a contract is under a fixed rate for a lengthy period of time (5-years or more) so the payment will not change during this time. Subjecting this profile of buyer/borrower to the stress test might hinder some from buying the property that they want because of an unnecessary inflated rate “stress test” that the buyer/borrower will never experience during the term of the mortgage.

So if we are to conclude who the new regulation will affect the most, it is that category of buyer/borrowers. Those who saved enough to buy the house of their dreams and are pursuing a fixed rate mortgage for 5 years or more. Unfortunately, they now have to qualify at a rate 2% higher than what the lender is offering them.

It is important to note that purchase agreements signed prior to 2018 may not be subject to the new rules

Newcomers, foreign buyers, rental properties, private lending and other types of property purchases and mortgages will need to be addressed separately and will depend on each situation.

As mentioned earlier, there are many details associated with mortgage approvals and offerings. I hope that the above was simple and straight forward enough to give the reader a basic idea on what to expect starting Jan 2018.

Blogged by:
Mohammad Abusaa (M. Abusaa)
Real Estate Broker of Record & Mortgage Agent

m.abusaa@akarat.ca
D. 416 825 7775

An example of the effect of the Non-Resident Speculation Tax (NRST) on Foreign Students in The GTHA

Part of what we do at AKARAT is what we refer to as “Real Estate Planning” with our clients. We typically start with a meeting to understand our clients’ needs and capabilities and explain the different options within the real estate market that might fit their current situation and future goals. Depending on the complexity of the situation, we would also bring to the table professionals in the mortgage, financial planning, accounting and legal areas to complement our work.

One segment of clients that we deal with and advise are foreign buyers. Some of them have children attending university in the Greater Toronto & Hamilton Area (GTHA). The typical advice for a family that is planning to send their child/children to study in the GTHA is to purchase a house/Condo rather than spending 4+ years paying for rent or the dorms. This makes more sense of course to those with more than one child going to university within a 10 years period for example. The numbers, pre the recent announcement, for a typical one bedroom in downtown Toronto would be in the range below:

  • One bedroom condo in downtown Toronto rents for $1,700.
  • The same one bedroom unit sells for $450,000
  • A foreign buyer with solid income/employment, etc. should be able to secure a mortgage at 35% down payment
  • Total purchase cost will be around $170,000 (35% of property price plus purchase costs).
  • Monthly expenses $1,650
  • Assuming 4% annual appreciation in property price, and selling it after four years (completion of studies), the savings vs. rent will be around $57,000

So if the student/parents can afford a $170k down payment, such an option might be attractive to them.

TODAY, after the announcement and the implementation of the 15% Non-Resident Speculation Tax (NRST), the numbers still make sense BUT the capital requirement became higher. For the same example above, the purchaser will also need to pay 15% of the purchase price upfront which will be refunded from the government in two years plus interest. Therefore, the total purchase “initial cost” will be $227,500 ($160,000 + 15% of $450,000).

All in all, in the past, one of the challenges we had with foreign non-cash buyers was to secure a mortgage at the lowest down payment possible which typically ends up being 35% with some exceptions. Today, not only do we have to deal with the mortgage challenge, but also with the “extra” 15% required at the point of purchase. Some foreign buyers cannot afford it even cash buyers, others don’t want to take the risk (for example they might not qualify for the refund if their child decides to leave school after one year), and some simply don’t feel that they will ever get the refund!

I guess it is simply a different marketplace today which we will adapt to. The numbers are still attractive for this segment. If we revisit the example above, one can look at it as putting down 50% of the property price as initial investment, securing a 65% loan on the property and getting a refund of 15% of the value plus interest in two year. The proposition still stands strong, the numbers just changed.

Blogged by:
Mohammad Abusaa (M. Abusaa)
Real Estate Broker of Record & Mortgage Agent

m.abusaa@akarat.ca
D. 416 825 7775

Will the recent announced measures affect the real estate market?

The province of Ontario recently introduced 16 measures as part of a package to enhance the protection of buyers, renters and attempt to stabilise the real estate market.

Out of the sixteen measures, only two might be considered to have immediate and/or short term tangible effect on a certain segment in the real estate market; namely, landlords, tenants and/or foreign buyers or investors.

These two measures took effect on the 20th and 21st of April 2017 and are:

  • Rent Control on private rental units in Ontario
  • 15-per-cent Non-Resident Speculation Tax (NRST)

The remaining 14 include long term plans and enhancements to existing programs that require time, money and other resources to be implemented.

In short, if you are a resident looking to buy or sell a house in the GTHA (Greater Toronto and Hamilton Area), the recent announced measures should not affect you today or in the near future. Yet, each case is unique and should be looked at separately. We highly recommend that you consult with your Real Estate professional for further advice based on your specific situation.

What changed in the residential rental market?
Landlords of properties built after 1991 were able to increase the rent on tenants as much as they wanted prior to this announcement. Now, such increase is capped at the annual inflation rate, not to exceed 2.5%.

This will motivate landlords to apply rent increases on tenants every single year to ensure that they are not at a disadvantage in the long term. On the tenant side, it encourages tenants to negotiate longer term fixed rent leases to secure fixed rental rates for a longer period. It is important to note that rent increases only apply to current leases and not to new ones.

Will this measure protect tenants?
Yes, it does add protection to tenants to a certain extent keeping in mind that rent increases apply to current leases and not new lease agreements.

Will it demotivate buyers from investing in rental properties?
No, it does not demotivate buyers from investing in rental properties. On the contrary, it adds clarity to what they should expect in future rental income.

While some landlords might see the new cap measure as a reason to exit the rental property market, it is important to study the numbers carefully before making such a decision.

What is the newly introduced Non-Resident Speculation Tax?
The 15% tax applies to purchase agreements signed after 20th of April 2017 and to the TOTAL value of consideration of the “residential” property when one OR ANY of the owners on title is a non-resident foreigner (please speak with your REALTOR and/or lawyer for more information if this applies to you or not – there are exceptions).

Foreign buyers only resemble around 8% in Ontario. In Vancouver, 6 months following the foreign tax announcement, foreign buyer involvement went down from 15% to 4% (a reduction of 73%). If we assume the same effect will happen in Ontario, then we should see a reduction in foreign buyer involvement from 8% to 2%. This creates an additional 6% of supply of properties.

Will this affect the price of properties in the GTHA?
It is important to acknowledge that the majority of properties that attract foreign investors are the typical 1 to 2 bedroom condo units located in the downtown core of the major cities in the GTHA. Therefore, one should not expect major effects, if any, in other segments of the market.

In Real Estate, there is no general rule that applies to everyone.  EVERY situation is unique and involves multiple factors to consider. Licensed real estate professionals are well equipped to provide you with advise as it relates to your specific needs. Make sure to involve them in your decision making process as they can bring different insights and opportunities to your attention.

For more information, please feel free to reach out to us at info@akarat.ca or directly at 416 900 8865.

Blogged by:
Mohammad Abusaa (M. Abusaa)
Real Estate Broker of Record & Mortgage Agent

m.abusaa@akarat.ca
D. 416 825 7775

Ontario’s infrastructure projects promote growth in the Real Estate market in the city of Vaughan

The status of the Real Estate market is usually a good indicator of how a country’s economy is performing. In Canada, according to BNN, Real estate activity was the biggest year-over-year contributor to growth, adding C$218.8 billion to Canada’s gross domestic product in April 2016, up from C$211.6 billion in the same period last year (published June 2016).

During the coming 12 years, the province of Ontario is planning to invest over C$160 billion in infrastructure, the largest in its history as a province. This is a result of a population growth that is expected to increase by 40% by 2041 (reaching 19m up from 13.6m in 2014). That is an increase of 5.4m in 27 years (200,000 per year). Since 2015, the province has announced support for more than 475 projects that will:

  1. Keep people and goods moving
  2. Connect communities
  3. Improve quality of life

Such investment in infrastructure is expected to create 110,000 jobs (on average) annually. This will obviously translate to an increase in economic activity in the province.

The city of Vaughan, where the highest population growth was experienced between 2006-2011 (20.7%), is one of the cities in the Greater Toronto Area where three major infrastructure projects are taking place:

  • Highway 427 Expansion:6 km from Highway 7 to Major Mackenzie Drive.
  • Toronto-York Spadina Subway Extension: a subway line from Downsview station to Vaughan Metropolitan Centre (located at Hwy 7 and Hwy 400).
  • Mackenzie Vaughan Hospital: The first hospital to be built in Vaughan and the first hospital in Canada to feature fully integrated “smart” technology which features systems and medical devices that can speak directly to one another to maximize information exchange.


Background information – The Greater Toronto Area (GTA)
The Greater Toronto Area (GTA) is located on a 7,124 km² area with a population of around 6 million (2011 Census). The GTA is comprised of 5 regions (Toronto, York, Halton, Peel & Durham) and includes 25 municipalities within those regions. The largest 7 municipalities in terms of population are as follows:

Municipality Population 2015 (est.) % of Total GTA Population
Toronto 2,720,000 44.93%
Mississauga 752,000 12.42%
Brampton 562,000 9.28%
Markham 349,000 5.76%
Vaughan* 320,530 5.29%
Richmond Hill 198,000 3.27%
Oakville 195,000 3.22%

* The city of Vaughan is the 5th largest city in the GTA and the 17th largest city in Canada

gta_map


Background information – Real Estate Stats:
Average price of a detached house sold in Sept 2016 (Source: Toronto MLS)

Municipality Average Price of Detached House Sept 2016
Richmond Hill

$1,568000

Markham

$1,402,000

Vaughan

$1,345,000

Toronto

$1,294,000

Oakville

$1,286,000

Mississauga

$1,002,000

Brampton

$729,000

Why Vaughan?
In addition to the aforementioned three major projects planned in Vaughan, there are a number of reasons that make Vaughan an attractive city for families, businesses and investors.

  • The city is building a new downtown area referred to as Vaughan Metropolitan Centre (VMC). Known as the largest and most significant development project in Vaughan’s history. It will include more than 1.5 million square feet of commercial office space, 750,000 square feet of retail space and 12,000 residences. One of the key features of this new downtown location is its connectivity to the subway network through the Toronto-York Spadina Subway Extension project. This creates a direct subway connection between the city of Vaughan and the city of Toronto, the fifth largest city in North America and the economic hub of Canada.
  • Another main attraction in the City of Vaughan is Vaughan Mills Shopping Centre which is recognized as the 10th largest indoor shopping mall in Canada and 7th largest in Ontario. It was opened back in 2004.
  • Just North of Vaughan Mills Shopping Centre is Canada’s Wonderland, Canada’s largest Theme Park which opened back in 1981. Canada’s Wonderland is ranked third in the world by number of roller coasters.
  • The Three Major Infrastructure Projects in VaughanWest of Vaughan and bordering with Brampton, Toronto and Caledon is the Vaughan Enterprise Zone (VEZ), an area of 1,120 Hectares encompassing mainly large parcels of land suitable for corporate Head Quarters, National Logistics and Distribution Centres. The area is located 10 minutes from Toronto Pearson International Airport (where 45% of Canada’s Air Cargo Volumes is handled). It is also where CP Rails largest intermodal terminal exists which has a handling capacity of more than 600,000 containers per year.
    Map of Vaughan.jpg

    The City of Vaughan

    vaughan-projects-2

    The Three Major Infrastructure Projects in Vaughan

map-of-vaughan-with-locations

Other Key Landmarks and Projects in Vaughan

Vaughan is certainly one of the cities to consider when making a personal or a business Real Estate decision. The forecasts are promising for the city’s real estate market on both the personal and business levels. Connectivity, services, location and demographics indicate a healthy economic growth phase over the coming years and therefore, a great place to be part of.

Follow our blog for more information about the Real Estate and Mortgage market in the Greater Toronto Area.

Blogged by:
Mohammad Abusaa (M. Abusaa)
Real Estate Broker of Record & Mortgage Agent

m.abusaa@akarat.ca
D. 416 825 7775