Changes to mortgage rules reinforce existing practices, industry says

“Our Government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it,” said Jim Flaherty, Minister of Finance.

The first new rule will require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future, according to the government.

This requirement did not come as a surprise to the industry, since many lenders already require variable-rate borrowers to meet the criteria under the five-year fixed rate standards.

“Currently, we require high ratio mortgages to be able to qualify using the five-year rate,” says Frank Techar, president of personal and commercial banking at BMO Bank of Montreal. “For several months now, BMO has been encouraging Canadians to stress test their financial budget using a mortgage payment based on a higher interest rate.”

Likewise, mortgage brokerage firm Invis Inc. requires its brokers to determine whether clients would still be able to afford their mortgage payments if rates were to rise. Regional manager Jim Rawson says this is common practice for most mortgage brokers and financial advisors.

“Really, any mortgage professional worth their salt sits down with their clients and actually goes over this scenario with them: ‘Will you be able to afford your mortgage if it does go up by one, two, three points?’” says Rawson. “Instead of it being a guideline now, it’s going to become a rule.”

Since the practice has already been in place among many lenders, Rawson does not expect the new rule to impact the ability of most Canadians to qualify for mortgages.

“It’s certainly going to make it somewhat harder for some people, but the percentage of the population that it will make it harder for is almost irrelevant,” he says. “If they couldn’t qualify on the new guidelines, they probably shouldn’t have been looking at properties in the first place.”

Industry members agree that the new measure will help borrowers prepare for higher interest rates.

“Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent,” says Techar.

The second change announced Tuesday reduces the maximum amount Canadians can withdraw in refinancing their mortgages to 90% from 95% of the value of their homes, as a way of ensuring that home ownership is a more effective way to save.

This change is unlikely to impact financial advisors, Rawson says, since most advisors would not typically encourage their clients to borrow so much: “I don’t think most financial planners worth their salt are telling people to borrow up to 95% of the equity on their home anyway,” he says.

The final change applies to individuals buying properties for speculation. It will require a minimum down payment of 20% — up from the current 5% — for government-backed mortgage insurance on small residential rental properties in which the owner does not reside.

Rawson says the largest impact of the new measures will likely be the public perception that the government is tightening mortgage guidelines.

“Any time we say that people are tightening up guidelines, people have this fear that all of a sudden they’re not going to qualify,” he explains. “I think what’s going to happen in the short term is that you’re going to see a lot of people out there buying properties now, because they perceive that it’s going to become more difficult.”

Industry firms such as BMO, and associations such as the Canadian Association of Accredited Mortgage Professionals, indicated that they support the new rules.

“CAAMP recognizes the importance of preventative measures to maintain a healthy mortgage market,” the association said in a statement.

The adjustments are expected to come into force on April 19th.