The new mortgage rules take effect today… Here is the Globe and Mail‘s take:
Ottawa’s tougher mortgage rules have sparked a rush by home buyers to get in before the new regulations take effect Monday, but may not dampen the real estate market to the extent observers believed.
“When the new mortgage insurance rules were announced, there was widespread expectations that this could help to cool the market,” said Toronto-Dominion Bank economist Craig Alexander. “But the true impact should prove limited.”
The rule that was expected to have the most widespread effect says all borrowers must meet the qualification standards for a five-year fixed-rate mortgage, even if they choose a variable-rate mortgage or one with a shorter term.
That means that, as of Monday April 19th, lenders must test customers who seek, for instance, a three-year variable-rate mortgage or a three-year fixed-rate mortgage, and ensure that they could still afford their monthly payments if they had to pay the higher rate that applies to a five-year fixed-rate mortgage.
But the rule doesn’t apply to customers who want a five-year fixed-rate mortgage. As a result, those customers face a less stringent test, since they need only prove that they can afford the rate they are actually signing up for.
Most of those customers are able to negotiate a significant discount off of the bank’s posted five-year rate. Indeed, they are generally paying a rate that’s closer to the rate on three-year variable-rate mortgages, and that’s the one they’ll be tested at.
“So most buyers could still qualify for the same size mortgage as under the old rules, so long as they take a five-year fixed mortgage product,” Mr. Alexander said.
Because many buyers didn’t know how the rules would be applied, some jumped into the market before the change, he added. “Despite the limited impact on qualifying, the new rules likely did encourage some additional sales earlier, which will contribute to a cooling later on.”
Eric Iankelevic, a mortgage agent with mortgagebrokers.com in Toronto, said this spring has been “hands down” his busiest ever. He estimates that his business of mortgage closings, either through refinancing or new purchases, is up 60 per cent in April and May from the same two months last year.
“It has been a robust spring market and I believe that has been driven by first-time home buyers who have been made aware of the rule changes by real estate and mortgage agents,” he said.
In addition to the rule changes, higher expected interest rates and the introduction of harmonized sales taxes in Ontario and British Columbia in July are pushing people into the housing market, Mr. Iankelevic said.
While the new qualification standards might not be as strict as many people believed, they still meet Ottawa’s goals, experts say.
The government designed the new rule to help ensure that homeowners will be able to afford their mortgage payments when interest rates rise. Rising rates are less of a worry for a borrower who has locked in for five years than for those who have three-year mortgages.
“The government stressed that the rule changes were not to deflate the housing market, but rather to diminish speculation and provide greater incentive for buyers to take mortgages that were less vulnerable to rising rates,” Mr. Alexander said.
THE NEW RULES AND THEIR EFFECTS
Here are the main changes to Canadian mortgage rules, that took effect on Monday April 19:
CHANGE 1: Qualifications
Borrowers must qualify for a five-year fixed-rate mortgage, even if they opt for a lower variable rate. Previously buyers had to qualify for the higher of a three-year fixed rate or a variable-rate mortgage.
A buyer of a $337,000 home will require $9,200 more in annual income to qualify. A buyer of a $200,000 home will need to earn $5,400 more.
CHANGE 2: Refinancing
Lower the maximum amount a homeowner can withdraw when refinancing a mortgage, to 90 per cent from 95 per cent of the value of the property.
The effect? Limited, although it could dampen the purchase of some large consumer goods bought through mortgage refinancing.
CHANGE 3: Speculation
Increase the required down payment to 20 per cent from 5 per cent for insured mortgages obtained for purchasing speculative housing investments not occupied by the owner.
About 5 to 15 per cent of mortgage deals will be affected in a “significant” manner, said Toronto-Dominion Bank, which predicts the rule will “significantly reduce the risk of speculation driving the market forward.”