Mortgages: changing the rules

With the Canadian residential real estate market in what are historically its two busiest months, April and May, events may play out a little differently this year.

The rules of the mortgage game have changed.

Two months ago, Federal Finance Minister Jim Flaherty announced three rule changes that take effect on April 19:

• All borrowers must meet the standards for a five-year, fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term.
• The maximum Canadians can withdraw when refinancing their mortgages drops to 90 per cent of the value of their home, from 95 per cent.
• Buyers must make now a minimum 20 per cent down payment — up from five per cent — to qualify for Canada Mortgage and Housing Corporation insurance for non-owner-occupied properties purchased as an investment. 
• The aim is to prevent homebuyers from getting into financial difficulty as mortgage rates rise.

"We want to discourage the tendency some people have to use a home as an ATM, or buy three or four condos on speculation," Flaherty said at the time.

The changes will take effect just as resale housing activity reaches its annual peak. This is the time when homeowners with children can sell and — assuming a closing date in three months — move out in June without uprooting those children during the school year, and yet still have time to buy and move before school resumes in September.

Genworth Financial, a private residential mortgage insurer based in Oakville, Ont., said the second week of April is historically the single busiest time of year for mortgage applications.

CIBC economist Benjamin Tal has come up with estimates on how mortgage activity will fall as a result of the changes. Tal calculated that moving to a five-year, fixed rate standard will cut the number of new mortgages by between five and six per cent.

Tal also estimates that reducing the available refinancing will cut mortgage volumes by as much as eight per cent, and that the higher down payment requirement on investment properties would cut business by between two and three per cent.

At the time the changes were announced, RBC Global Asset Management chief economist Patricia Croft said there might be a pick-up in sales ahead of the April 19 date, as people scramble to get in under the deadline.

Rates a bigger issue

Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals, which represents mortgage brokers, told CBC News he's noticed "a bit of that," but it's hard to say how much is related to the rule changes and how much to the decision by many lenders in late March to increase rates by 60 basis points, something he called "a pretty significant move up."

"As a consequence of that," said Murphy, "many consumers who were in variable rate product are locking into a fixed rate product because rates are obviously going higher."

"It's going to take a while for those regulations to really take a bite," Gregory Klump, chief economist with the Canadian Real Estate Association, told CBC News.

For one thing, all those buyers with pre-approved mortgages up to April 18 will be protected.  And, he said, borrowers who have a good relationship with their banks can still negotiate something less than the five-year posted rate.

Klump agreed that rising rates have had more effect on demand than the rule changes.

"We're not seeing a whole lot," said Klump. "We're getting anecdotal evidence that people are looking to get in before the regulations change, but that is also being driven by interest rates heading higher."

Adding to that, Klump said, is the introduction of the Harmonized Sales Tax on Ontario and B.C. on July 1, which will apply to new houses. He expected that once the rush to get ahead of rising rates, rules changes, and higher taxes is over, prices increases will level out for the second half of the year.

7.5% could be tipping point

And if rates go higher still, he said, those increases could cut into demand earlier than they have in the past.

"People's debt levels are a lot greater right now, so it takes smaller rate increases before they no longer qualify … for mortgage default insurance," he said.

While in the late 1980s and early 1990s, 10 per cent was the level at which mortgage rates really started to bite into activity, Klump said, "I suspect now the mortgage rate level has been reduced now to probably about 7½ per cent."

Still, Murphy doubts the rule changes will significantly chill the market, not with still-low interest rates and improving employment.

"We have come through a period in Canada where we have had record, record, record low mortgages rates that we will never see probably for a generation," he said. "Rates are everything in the mortgage market."