Jan 17, 2011, Tougher mortgage lending rules could affect number of people buying Calgary homes

Tougher mortgage lending rules announced Monday may price some people out of the real estate market this year as the federal government moves to ease the growing fears of household debt in the country.

Changes announced Monday include:

– the maximum mortgage amortization for government-backed mortgages was reduced to 30 years from 35 years, effective March 18. It was reduced to 35 years from 40 years in October 2008;

– also effective March 18, the maximum amount of a home’s value that can be refinanced is lowered to 85 per cent from 90 per cent. The 90 per cent amount was lower from 95 per cent in April 2010;

– effective April 18, insurance will no longer be available for non-amortizing lines of credit. Under current rules, home equity lines of credit (HELOC) are available up to 80 per cent of a home’s value.

Adrienne Warren, senior economist with the Bank of Nova Scotia, said the measures “will reinforce what we were expecting to be a slower pace of real estate activity” as the change in amortization would increase carrying costs for an average home by about $100 per month.

“It could price some people out of the market at the margin, but it suggests (Canadians) will have to take on smaller debt than they otherwise would,” she said.

But Diane Scott, outgoing president of the Calgary Real Estate Board, said the changes were anticipated “and they could have done an awful lot more harm.”

“I don’t think it’s going to affect a lot of people. It’s minimal,” she said.

“It doesn’t scare us a lot.”

Todd Hirsch, senior economist with ATB Financial in Calgary, said the federal government is taking a positive move.

“I don’t think the move will have that much affect on the market,” said Hirsch. “It’s just ratcheting things up just a little bit tighter following what they did last year in April when we saw a similar kind of move on the margin to protect some of those people who would be at risk of getting into trouble.

“You don’t want to wait until a crisis happens and then have to dramatically tighten the mortgage lending rules or borrowing. And then there’s going to be problems.”

Pascal Gauthier, senior economist with TD Bank Financial Group, said the amortization change could affect 20,000 home sales across the country and weaken the average sale price by one per cent.

“We want to make sure we don’t have the kind of medium-term problem that has been experienced elsewhere because of this tendency by some to assume large indebtedness at low interest rates,” Finance Minister Jim Flaherty said in making the announcement in Ottawa on Monday. “People need to demonstrate that good Canadian trade of prudence and reasonableness in terms of their debt assumptions.”

He said the growing appetite for the lines of credit was of particular concern and was an “important” factor in the rise in overall household debt.

Flaherty said some banks were insuring, through Canada Mortgage and Housing Corp., their exposure to HELOC liabilities, and wants to put an end to that practice.

“That’s particularly risky,” he said. “Some of those loans are not used to create housing in Canada. They are used to buy boats and cars and big-screen TVs. That’s not the business mortgage insurance was designed for.”

Michael Gregory, senior economist with BMO Capital Markets, said the new measures were put in place for when Canada’s housing market “wakens from its winter slumber in a couple of months.”

“For the new homebuyer, the reduced amortization is a significant change that should soften the demand for homes/mortgages below what they otherwise would have been,” he said. “It also provides a bit more cover for the Bank of Canada. They don’t have to resort to policy rate hikes as readily to address high and rising household debt burdens, which would have dampening impacts well beyond just the housing sector.”

Jim Murphy, president and chief executive of the Canadian Association of Accredited Mortgage Professionals, said the association supports measures that strengthen owners’ equity in their homes and encourages the reduction of their mortgages. CAAMP is also pleased that there was no change to the down payment requirement as it recommended, he said.

“Rather than reducing the amortization period to 30 years from 35, as the Minister has announced, we would have preferred that the government had required those people seeking 35 year amortizations to meet the same qualifying standards as those with a shorter amortization. We hope the government will revisit this one feature as the economy strengthens,” he said.

By Mario Toneguzzi, Calgary Herald

With files from the Financial Post