Buying first home gets tougher

Daniel
Daniel MacEachern
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Effect of new mortgage rules examined in report

John Dearin

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.

 

dmaceachern@thetelegram.com

Twitter: @TelegramDaniel

Organizations: BMO

Geographic location: Atlantic Canada

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Recent comments

  • david
    July 11, 2013 - 13:12

    Owning a house is not a right, it is a privilege. And it involves a chunk of actual money, not just easy credit. If people ever sober up, they might learn that the easier and cheaper way instead of the expensive, hard one.

  • If
    July 09, 2013 - 21:22

    "You used to be able to go to 90 per cent" If you need to borrow that much to pay off credit cards, you have bigger problems than a mortgage. Credit cards are ridiculous. Banks make a fortune off them and department stores are worse.

  • a business man
    July 09, 2013 - 20:03

    To me, the effects of the changes are a good thing because it means that there is a greater demand for rental units because people cannot afford to buy. This means that I charge more in rent and make more profit. James - I picked up a very nice place in a nice neighbourhood in Florida for dirt cheap. Frankly, with the low interest rates, the cheap US real estate, and the ability to charge higher rents on properties that I have already paid off in Newfoundland, it is my belief that the US housing crash is the gift that keeps on giving.

    • Brad
      July 10, 2013 - 11:33

      You should ask the Irish how that attitude worked out for them...most people I know of like you lost more than their shirts when the property market collapsed.

    • Sick of people like you
      July 11, 2013 - 09:45

      Its people like you that make it hard for the average person to survive. Yea!! lets raise the rent so i can line my pockets, screw the tenant,or the person trying to pay the bills. You will get your reward in the end.

    • a business man
      July 11, 2013 - 18:34

      I am not trying to make life hard for anyone to survive. I own property, and I charge what the market will allow me to charge. If a tenant cannot afford the rent and their expenses, they can leave and I will find someone else who can afford the rent. In this economy, it is really not hard. It is actually better for me when someone cannot afford the rent and leaves because then I can try to get someone to pay a higher rent. At the end of the day, I just want to get the most money for my property. Nothing more, nothing less.

    • Tracey
      July 13, 2013 - 03:39

      What happens when people can't afford to rent? Not everyone in Newfoundland works for the oil companies or are "business men" like you. You should feel real good about yourself Mr Business Man. The government should be after stepping in LONG AGO to regulate the amount of rent people like you can charge in this province.

    • a business man
      July 17, 2013 - 07:07

      Tracy, there willl always be someone who can afford the rent. So if a tenant cannot afford the rent, then they can leave and I will find some one new. I have never not been able to find a new tenant. I do feel good about myself, because I am providing for my family and its future generations. I provide high quality rental housing at the cost permitted by the market. I rent homes for what they are worth, not a penny less. If the government imposes regulation that cuts my profits, then I will find a way to make that money back. I charge the rent that the market can support. There are plenty of people who can afford the high rent, and those who cannot have no one to blame but themselves. I did not become a landlord to provide housing for those who cannot afford it. I am not the government, I do not proivde social services. I charge high rents, I raise the rents every year, and profit is the only objective. My tenants do not matter, their finances do not matter. Even though these properties have been in my family for years and are paid off completely, I still raise the rents. I can afford not to, but I rise the rents anyway because the market will support it.

  • James
    July 09, 2013 - 14:36

    It makes perfect sense. Long term loans and massive equity spending against homes is what caused the collapse in the states. Mind you - was good for me as I picked up a condo in Florida for a song.

  • Henry
    July 09, 2013 - 13:12

    To me, the effects of the changes are a good thing, because to often people are getting in way over their heads. It's just to bad that the Gov't has to changes the rules to force this on people, rather than people having enought common sense to not get in over their heads.