OTTAWA — Finance Minister Jim Flaherty tightened mortgage rules on Tuesday and, in doing so, may have taken the steam out of a housing market that had seen prices and sales activity rise rapidly over the last year.
For most consumers, the changes are unlikely to make it more difficult to get a mortgage but it could reduce the size of the mortgage an individual consumer can negotiate with a lender.
"The changes (he) announced today . . . will actually impact the experience that all Canadians have when they go into banks to get loans," said Craig Alexander, deputy chief economist at TDBank Financial Group.
Flaherty's changes apply to any mortgage backed by the federal Canada Mortgage and Housing Corp. (CMHC).
But Alexander said the practical effect of any changes to the rules around CMHC-backed mortgages is that lenders tend to extend at least some of those provisions to all mortgages.
More than two-thirds of Canadians own their own homes, a record for home ownership.
In Alexander's view, that means those who qualified for a mortgage under the old rules should still be able to get one using Tuesday's announced regulations but they may not be able to borrow as much and, as a result, might have to look at buying slightly less expensive properties.
That trend — forcing consumers to look at less expensive properties — could end up softening the sharp year-over-year price increases that have been characteristic in many cities recently. The Canadian Real Estate Association says that in December, the average selling price of a home in Canada was a little more than $337,000, a jump of nearly 20 per cent compared to the same month a year earlier.
The change most likely to affect most borrowers will be a new credit test for any CMHC-backed mortgage.
Previously a lender wanted to ensure that a borrower could make the monthly payments of a three-year fixed-rate mortgage. Now, lenders will want to see that a borrower can afford a five-year fixed-rate mortgage — even if the borrower plans to take out a mortgage with different terms that could result in a lower monthly payment.
For example, a consumer might want to borrow $200,000, amortized over 20 years, at the low rate associated with one-year fixed-rate mortgage — about 2.65 per cent right now. A monthly payment on that mortgage would be about $1,035.
But the lender must now make sure that borrower could afford the rate for a fixed, five-year mortgage — something closer to 4.5 per cent. The monthly payment on that kind of mortgage would be about $1,260.
The lender must make sure the borrower has that extra few hundred dollars a month to spare, even if the borrower is signing up for the mortgage with lower monthly payments.
Or, to flip this scenario around, if a borrower is limited to making monthly payments of $1,035, that would be enough to borrow $200,000 on the one-year fixed rate mortgage rate of 2.65 per cent but would only be good enough to borrow about $165,000 for a five-year fixed rate. Under the new rules, the consumer, in this case, would be limited to borrowing just $165,000 even if the consumer could negotiate different and cheaper terms for the mortgage.
The end result is that some potential home buyers will not be able to borrow as much from the bank and will have to buy less expensive homes.
"At the margins this will affect affordability and, in turn, activity," said Gregory Kump, chief economist for the Canadian Real Estate Association.
Flaherty also said those who wish to refinance their mortgage can only borrow up to 90 per cent of the assessed value of their home, down from 95 per cent. The intent behind that rule is to prevent a homeowner from carrying a mortgage that is worth more than the home itself.
"The underlying message is that Canadians should be prudent in the obligations they take on because we can all expect that mortgage interest rates will rise over time,"said Flaherty.
Flaherty's new rules are likely to have their biggest impact on those who buy investment properties for the rental market. Investors will now have to put up 20 per cent of the purchase price instead five per cent in order to get a government-backed mortgage to buy any property that is not the lender's own residence.
"I just don't want CMHC and the Canadian people to be in the business of guaranteeing speculative mortgages," Flaherty said.
Flaherty kept the minimum down payment at five per cent for those buying the home they plan to live in.
"The measures that I've announced this morning will not affect the ability of a Canadian family to buy a house," Flaherty told reporters in Ottawa. "It will affect those who are speculating. It will affect those who want to remortgage their house and get what is in our view an excessive amount of cash out of the house."
Though the new rules go into effect April 19, lenders are likely to begin enforcing most of these measures immediately.
"On the one hand, we don't want to discourage Canadians from home ownership. On the other hand, we do want to discourage a tendency by some to use their homes as an ATM machine, the tendency by some to buy three and four condominiums, for example, by way of speculation," Flaherty said. "We have a healthy housing market in Canada, but we want to keep it healthy."
Flaherty's new rules
Finance MinisterJim Flaherty announced new restrictions Tuesday for any borrower who wants a mortgage backed by the Canada Mortgage and Housing Corporation. Though they officially go into effect April 19, experts say lenders will likely put them into place immediately:
1. All borrowers will have to be able to demonstrate that they could make the payments on a five-year fixed rate mortgage even if they end up choosing a mortgage, such as a variable rate mortgage, that would result in smaller monthly payments.
2. The maximum amount consumers can borrow to refinance their mortgages is being lowered to 90 per cent of the value of the home, down from 95 per cent.
3. Anyone who wants a government-insured mortgage to buy a home that they will not live in will have to come up with a down payment of 20 per cent, up from five per cent.
Source:Department of Finance