Tougher lending rules heralded

The president of the Central Alberta Realtors Association is taking a glass-half-full perspective on tighter lending rules.

The president of the Central Alberta Realtors Association is taking a glass-half-full perspective on tighter lending rules.

“In the grand scheme of things, I think it makes for a healthier home ownership environment,” said Patrick Galesloot, broker-owner of Century 21 Advantage in Red Deer. “His efforts are trying to get people mortgage-free faster.”

Effective March 18, the maximum amortization period for government-insured mortgages with a loan-to-value ratio of more than 80 per cent will be 30 years, down from 35 years. And homeowners will be allowed to borrow no more than 85 per cent of the value of their property when refinancing mortgages, as compared with the current 90 per cent limit.

The government will also stop insuring home equity lines of credit, which use the property’s value as collateral, as of April 18.

Galesloot acknowledged a shorter amortization period will affect some people’s ability to finance a home purchase. But they’ll be in the minority and will still have options.

“It’s not actually going to squeeze them out of the market, but it’s going to change their price range a little bit.”

Chris Richards, a local mortgage broker with Mortgage Intelligence, said the amortization period change equates to about $35 per month per $100,000 borrowed. And it will reduce the maximum mortgage that a borrower could qualify for by about $22,000.

“The expectations (of marginal home buyers) get modified ever so slightly,” he said. “I don’t think that’s going to be much impact.”

Richards added many borrowers who opt for longer amortization periods pay their mortgages quicker anyway. They simply want the flexibility to make smaller payments if their circumstances require it.

Richards said he’s pleased the government didn’t increase the required down payment on a house from the current five per cent.

“That would have really knocked more people out.”

As for the new refinancing limit, Galesloot also put a positive spin on things. The government, he said, is concerned about homeowners squeezing equity out their homes to pay for lifestyle amenities, which is a recipe for disaster if property values decline.

“This helps people stay in their homes and avoid overextending themselves too much with that sort of debt.”

Richards agreed.

“These new rules will make it more difficult for the borrowers who are trying to use their house as an ATM to finance their truck or their trailer.

“They (the federal government) want that money left in your home and they want you to pay down your debt on your mortgage.”

Todd Hirsch, a senior economist with ATB Financial in Calgary, also sees the rule changes as an attempt to help people keep mortgage debt under control.

“I think the message Ottawa wants to send is we don’t want real estate bubbles building, or marginal borrowers getting into vulnerable position where they take on too much mortgage debt.”

Hirsch added that the measures were targeted to hit borrowers who are more likely to get in over their heads.

“The occasional buyer, they’re tempted to just max out the highest mortgage they can possibly get and take the longest amortization just to get the monthly payment down to something they can barely manage. That’s not a good situation to be in, especially when we know that these mortgage interest rates are going to eventually start rising.”

Last April, the federal government implemented other rules that tightened mortgage borrowing. That led to an increase in home purchases prior to the changes taking effect, and fewer first-time buyers afterwards.

“But I think the hit was pretty small, and I think this hit this time around will also be pretty small too,” said Hirsch.

He added that further rule-tightening could occur in the future, when the government believes the market is strong enough to withstand it.

hrichards@bprda.wpengine.com