Buying a first home or taking out a loan against an existing residence will be more difficult for Canadians under new rules announced this past June, but Finance Minister Jim Flaherty says it’s for their own good.
For the fourth time in as many years, the finance minister moved to tighten the mortgage and lending landscape – changes that mean up to 5% of Canadians who might be considering buying a new home will likely no longer qualify.
This time Flaherty’s cutting the maximum amortization period for government insured homes to 25 years from the current 30 years, and limiting how much homeowners can borrow on the value of their homes to 80% from 85%.
Those are not the only changes the government is making.
It will no longer be in the business of insuring homes that are worth more than $1 million – meaning buyers will need to put up at least a 20% down payment or seek private insurance.
As well, it will insist that prospective buyers have the means to afford mortgage payments, property taxes and heating costs on their home. It will do so by setting cost ratios based on household income – a kind of affordability ratio – of 39% for gross debt service and 44% for total debt service.
“It’s a question of trying to moderate behaviour and I hope Canadians will reflect before they jump into a market at the high end,” Flaherty said.
“It will mean that some people will not buy into the market, it will also mean that some people will buy less into the market, they’ll buy a less expensive home or less expensive condominium.
“Good. I consider that desirable.”
The changes will go into effect July 9.
The most significant change is the reduction to the amortization period, bringing it back to the level it had stood historically before rising to as high as 40 years during the heady prerecession days of 2006.
The government said on a $350,000 mortgage with 3% interest, it will increase monthly payments by $184 over what they would have been with a 30-year amortization. Over the lifetime of the mortgage, however, the homeowner will save $33,052 in total interest payments because the home would have been paid off five years earlier.
Economists generally backed the changes, with some reservations.
CIBC deputy chief economist Benjamin Tal said he wondered about the timing of the announcement, given that house prices were already receding. He estimated it could reduce new sales on homes by between 3% and 5%.
That’s not an insignificant hit to a fragile economy that’s been riding the coattails of a strong housing and building boom, which supports construction activity and jobs.
“It will not derail the housing market, but it will be felt,” Tal said. “(The housing market is) already slowing and if you push too much when we are already slowing, you could fall.” Canadian Real Estate Association president Wayne Moen called the new rules “measured,” but also reminded the government that it is courting danger.
“The re-sale housing market makes a significant contribution to the economy, adding an estimated $20 billion in spin-off spending and over 165,000 jobs in 2012,” he said in a statement.
“The impact of measures like those announced today must be closely monitored to ensure they have the anticipated impact and don’t create a spillover effect and slow the economy.”
The latest move is part of a series of initiatives undertaken recently by the federal government to slow the accumulation of debt by Canadian households, which reached a record 152% of income in the fourth quarter of last year.