MONTREAL - Some Canadians in expensive real estate markets may have to change their game plans for buying a first home because of new rules announced this week by the federal government.
While the changes are unlikely to be a deterrent for most Canadians, it could make it harder for those on the fringes to qualify for mortgages, industry observers say.
"You'll have the odd marginal purchaser who might be affected by this but I think that these are reasonable ways to keep spending in check," says Dale Ripplinger, president of the Canadian Real Estate Association and a realtor in Regina.
The changes are designed to prevent Canadians from taking on too much debt ahead of expected interest rate increases later this year. It's a situation that contributed to the housing crisis in the United States.
"If you can't qualify for a five-year fixed (mortgage) in terms of your total debt servicing, then maybe you shouldn't be buying a house to begin with," says Jim Murphy the Canadian Association of Accredited Mortgage Professionals.
As of April 19, all borrowers must meet the requirements of five-year fixed-rate mortgages, even if they opt for lower variable rates.
The change would raise the income required to purchase a house, but not necessarily monthly payments.
Those squeaking by using lower three-year rates as a yardstick may be forced to act quickly before the rules take effect, set their sights lower or remain a little longer on the sidelines, he says.
Ripplinger says most Canadians are already cautious about overextending themselves by taking on too much debt to purchase a house. But those in hot markets such as Vancouver, Toronto and Calgary are often forced to dig a little deeper.
Buyers who have found the house of their dreams may want to rush in ahead of the deadline and risk overextending themselves to ensure they qualify under existing rules.
The end of historically low interest rates won't deter most would-be buyers. Rising rates, the new rule changes, the seasonally strong spring season and the impending sales tax harmonization in Ontario and British Columbia could lead to a healthy real estate market during the first half of the year.
But Ripplinger says some may step back and decide they can't afford to buy a house right now and wait to save up a larger down payment to reduce the amount of income required to service the mortgage.
Adrienne Warren, senior economist of Scotiabank, says the changes should help to reduce bidding wars, especially among higher-priced properties.
"By reducing some of the risk of bidding wars and the like, it's probably a positive for the market and will help keep prices down a little bit than they otherwise would be," she says.
Warren expects the Bank of Canada will raise its base rate by one percentage point to 1.25 per cent at mid-year, followed by another one-point hike in 2011.
The changes announced by Finance Minister Jim Flaherty also include reducing the amount of equity a homeowner can take out of their property to 90 per cent, and requiring a 20-per-cent down payment for government-backed mortgage insurance on "speculative" investment properties.
The mortgage professional association doesn't believe the Canadian real estate market has overheated, and Murphy says he's pleased the government didn't make changes that would impact all mortgage-backed purchases.
"You could overreact, you could really close the housing market down by putting in more stringent rules in a very fragile economy," he said.
Among the changes it didn't want to see was requiring minimum 10 per cent down payments and further reducing amortization periods.
The changes follow adjustments made two years ago, including the elimination of 40-year amortizations.
Murphy urges those who are unsure about whether the changes will affect their dreams of becoming homeowners to consult with mortgage professionals.
"They should go to a mortgage professional, whether it's a credit union or their mortgage broker. They're the ones who are the educated ones that they should ask all these questions of."
They can also consult with several websites for more information. Among them are the association's consumer site at www.champ.org and Canada Mortgage and Housing at www.cmhc-schl.gc.ca.