The changes to Canada’s mortgage insurance rules likely won’t have a dramatic effect on the market, but should cool it down a bit and reduce speculative investing, says TD Economics.

On Tuesday, federal finance minister Jim Flaherty announced three changes to the Canadian mortgage insurance rules.

“First, mortgage loans will be income-tested against the 5-year posted rate, rather than the current practice of using the 3-year posted rate. Second, mortgage refinancing will be restricted to 90% of the value of the home, down from 95%. Third, buyers of non-owner occupied dwellings will need to provide a 20% down payment,” TD explains.

“In our opinion, the announced changes are prudent. They will not dramatically impact housing; but, they will help to cool the market, temper speculation and reduce the risk to personal finances from the inevitable future rise in interest rates,” TD says.

It notes that while these changes only affect government-insured mortgages, “the new rules will probably be applied to all mortgage lending.” And, it says that although the changes aren’t slated to come into effect on April 19, lending practices will likely change well before then, too.

TD says that there’s not much evidence that a housing bubble has formed in Canada. “Accordingly, a change to the minimum down payment for owner-occupied homes or a reduction in the amortization period was not warranted at this time. Such actions might be considered if the housing market significantly heats up during the spring and summer,” it adds.

“Nevertheless, for a housing bubble to form, speculative buying would be a major contributor. The announcements about the larger downpayment for non-owner-occupied dwellings reduce the risk of this speculation occurring,” it says.

Also, it believes that changing the practice of income-testing to use the 5-year post rate “seems prudent”. And, limiting the equity that can be withdrawn from a home to 90% “seems a sensible change that encourages personal wealth accumulation over consumption”.

“In terms of our outlook for housing in the coming year, the policy changes do not materially alter the outlook,” TD concludes. “We continue to look for sales to decline by 5-10% in year-over-year terms by the fourth quarter of 2010 and for national average home price growth to moderate to 2-3% in that time frame. If anything, the regulatory changes simply reduce the upside risks to this projection.”

TD notes that many borrowers, lenders, builders and others affected by activity in real estate markets may not like changes to the regulatory environment, but that it believes it’s necessary to .avoid boom/bust cycles in real estate. “The optimal outcome is moderate sales growth, accompanied by sustainable price increases, which keep affordability accessible to potential buyers, and within a market that provides the right incentives for debt management. Today’s regulatory changes seem consistent with these objectives,” it says.