Effect of new mortgage rules examined in report
One year after the federal government tightened mortgage regulations, local brokers say the new rules have had a noticeable effect on first-time buyers.
On July 9, 2012, new mortgage rules came into effect, having been announced in June by Finance Minister Jim Flaherty. Among the changes — and the ones with the biggest effect on first-time home buyers — were that the maximum amortization period was reduced to 25 years from 30 years, and the maximum amount of equity homeowners could take out of their homes in refinancing was reduced to 80 per cent from 85 per cent.
Claude Sullivan of East Coast Mortgages said the change in amortization rules have reduced the size of mortgage people qualify for.
“With our price ranges in
St. John’s, it’s making it difficult to get into a home for a first-time buyer,” he said. Those buyers are responding to the rules in a variety of ways, including waiting to buy or opting for smaller homes — or tapping Mom and Dad to help out with the down payment.
“We’re seeing that people are qualifying for less, therefore having to buy smaller homes,” he said. “We’re seeing an increase in demand for resale homes, as opposed to new homes. The new home market is still strong, don’t get me wrong, but more people now can’t afford the new homes, so they’re looking at the resale market quite a bit.
“Another thing we’ve noticed in the past couple years, more and more of a trend, is parents being involved in assisting the kids with having to get into that first home, either by way of helping them out with down payment or sometimes co-signing the deal.”
Broker John Dearin of DLC Mortgages and More in St. John’s, said it’s hard to tell how much effect the rules had, because the early part of 2012 was “just nuts” anyway.
“Everybody was getting mortgages. But shortly after these announcements came into effect, we did notice a downturn in business, particularly in January, February, March of 2013,” he said. “What we have noticed is that more and more younger people are not getting to qualify. … We’re finding a lot of people that are getting turned down, they’re just not coming back, and all we can do is say, ‘What you need to do is save a few more dollars for a down payment.’”
The rule that capped prospective homebuyers’ debt-service ratios has also been tough on younger buyers, said Dearin, especially combined with higher monthly mortgage payments due to shorter amortization periods.
Not that the housing market in St. John’s has really cooled off — home prices continue to rise. “What we lost in business in January, February and March, we more than made up in April, May and June,” said Dearin.
The new rules weren’t the only contributor to the slowdown early in 2013 — layoffs in the provincial government’s budget had at least a temporary chill, said Sullivan.
“There was a general cooling-off period after the budget,” said Sullivan. “As a matter of fact, there was a period when the phones were ringing, and then a day or two after the budget, the phones sort of stopped ringing. I think it has as much of a psychological effect as it does an economical effect. But that tends to pass, and I’ve seen that it has passed — give it some time to people to accept the reality that the sky is not going to fall in, and everybody’s not going to be out of work.”
The refinancing rule has also slowed down people looking to refinance their homes in order to help tackle other bills, like credit card debt, said Dearin. “Now, to refinance, you can only go 80 per cent loan-to-value,” he said. “That’s affected a major number of people who want to refinance to clean out smaller debt: credit cards, things like that. You used to be able to go to 90 per cent. That extra 10 per cent has really cut back on people being able to refinance.”
Frances Hinojosa — a mortgage specialist with BMO, which issued a report Monday on the effect of the changes on buyers — said it’s not surprising there was some effect.
About two-thirds of first-time buyers said the changes wouldn’t have an effect on their purchase, while 19 per cent said they’d wait longer to buy, with variations by region. In Atlantic Canada, 28 per cent of respondents said they’d wait longer to buy.
“I think it does have some impact. I think it does cause some people to pause and wait,” she said. “Anything new that comes out may deter people from buying a home.”
Having said that, Hinojosa added that prospective buyers should talk to a financial expert to see how much any new rules would actually affect their purchase plans.