Many Canadians will be forced to scale down their real-estate ambitions under new mortgage rules that aim to both keep people from taking on too much debt and rein in speculators, all without knee-capping an industry that has been a major driver of the recovery.
The tighter standards come after months of debate about whether a bubble is forming in the housing market and repeated urging by policy makers for borrowers and lenders to be prepared for higher interest rates.
The changes, announced yesterday by Finance Minister Jim Flaherty, are designed to keep Canadian consumers from becoming perilously overstretched, and deter speculators from buying houses solely as investments. Observers and industry players said the steps aren't likely to smother the broad strength in the housing market, where eager buyers often armed with hefty mortgages have bid up prices sharply over much of the past year. The Finance Minister said he was unveiling the measures now, before the need for them becomes more urgent.
"There are no definitive signs of a housing bubble," Mr. Flaherty told reporters in Ottawa. Nonetheless, "we're being pro-active," he said, to "help prevent negative trends from developing."
Starting April 19, all new borrowers will have to meet standards for five-year, fixed-rate mortgages even if they're seeking a shorter, variable-rate loan. Also, the government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent, and requiring a 20-per-cent down payment for government-backed mortgage insurance on "speculative" investment properties.
Measures considered but rejected included an increase to the minimum down payment on homes from 5 per cent, and shortening the maximum time over which borrowers can spread out their payments from the current 35 years.
"They were very targeted," Jim Murphy, president of the Association of Accredited Mortgage Professionals, said in an interview. "Our concern was that the government not overreact and institute measures around minimum down payments and shorter amortizations that could affect the housing market during a very cautious economic recovery."
According to an analysis by Toronto-Dominion Bank, the requirement that new buyers be able to afford the posted five-year rate - which is currently about 5.4 per cent - will "temper" demand somewhat because about a quarter of new mortgage applications might not pass that test. Still, the impact will be "constrained" because many will just buy a lower-priced property instead.
The effect of the stricter refinancing rule should be limited, TD said, since less than a third of those modifications involve owners with loans of between 90 per cent and 95 per cent of the home's value. TD also praised the measure on speculative purchases, saying, "for a housing bubble to form, speculative buying would be a major contributor."
Tim Hockey, head of TD's Canadian banking operations, said Ottawa found a good balance between doing too much and doing too little.
"It's pretty difficult to figure out what the right balance is; this feels about right," he said, even though he acknowledged prices could go down because the tighter rules might increase the supply of houses available for sale.
At the moment, TD assesses whether customers seeking three-year variable rate mortgages would be able to afford the monthly payments on a three-year fixed-rate mortgage.
Scotia Capital economist Derek Holt said tighter criteria for mortgage applications could cause the housing market to "really heat up" over the next few months before cooling later, predicting "short-term price scrambling" as buyers try to get approved before the stricter rules come into force.
Mr. Holt noted that the Harmonized Sales Tax or HST due to take effect in Ontario and British Columbia on July 1 is already causing some buyers to rush into the market in a bid to close deals in advance.
Mr. Flaherty stressed that some lenders are already applying more stringent standards when approving buyers, but said today's announcement was needed to ensure others start doing so. He said the rules are meant to "have some stabilizing effect" and encourage "moderation" in the market so Canada can avoid the "excesses" that led to the subprime meltdown in the United States.
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THE NEW RULES AND THEIR EFFECTS
Here are the main changes to Canadian mortgage rules, to take effect April 19:
CHANGE 1: Qualifications
Borrowers must qualify for a five-year fixed-rate mortgage, even if they opt for a lower variable rate. Currently buyers must qualify for the higher of a three-year fixed rate or a variable-rate mortgage.
A buyer of a $337,000 home would require $9,200 more in annual income to qualify. A buyer of a $200,000 home would 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."
Reuters, staff, TD Bank
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With files from reporters Bill Curry and Rob Carrick in Ottawa and Tavia Grant in Toronto