For the fourth time in as many years, the Canada Mortgage and Housing Corporation (CMHC) has tightened mortgage rules, and Valley First Credit Union says the latest round of changes, which take effect Monday, may have a significant effect on homeowners and potential buyers.
The major changes to mortgage rules include reducing the amortization on government-insured mortgages from 30 to 25 years, and lowering the amount of equity homeowners can take out of their homes in a refinancing of their home from 85 to 80 per cent.
The new rules, announced by finance Minister Jim Flaherty, are designed to make it harder to buy and borrow against your home, slow the growth of a potential real estate bubble and curb the accumulation of household debt.
“Lowering amortization and refinancing ratios is a good move,” said Jim Lamond, vice-president of credit at Valley First. “This change will protect homeowners from borrowing too much against the value of their homes, which can be a real concern in areas that are seeing a drop in home value.”
While Lamond agrees with tightening the rules around refinancing, he notes the shortened amortization will place a heavier burden on people looking to buy a home.
“Cutting amortization is going to make purchasing a home difficult for younger people and first-time buyers. Affordability will take an instant hit, pricing many people out of the market.
“Couple this with our decreasing rental vacancy rates; we could see a situation where those who can’t afford to buy are suddenly facing steep increases in rent.”
Lamond explains the reduction in amortization roughly equates to an increase in mortgage rates of about 0.9 per cent (assuming a five-year fixed mortgage rate of 3.3 per cent on a $290,000 mortgage, after a 20-per-cent down payment on an average home). Beyond buying and refinancing, the cooling effect new mortgage rules potentially could have on the housing market may negatively impact the wider economy.
“We have been hearing the growing buzz of construction in a number of communities around the Interior,” said Lamond. “A lot of people rely on this industry for their livelihood. If we dampen the growth in this sector, we could see significant flow-on effects such as declining investment and job losses.”
Other changes in mortgage rules include limiting the availability of government-backed mortgages to homes with a purchase price of less than $1 million; fixing the maximum gross debt service ratio at 39 per cent; and the maximum total debt service ratio at 44 per cent.