For the second time in twelve months, Federal Finance Minister Jim Flaherty and the Department of Finance tightened rules on residential mortgages to help slow the pace of household debt accumulation. Changes include shortening the amortization period to 30 years (which had already been shortened from 40 to 35 years in 2008), withdrawing CMHC insurance on home equity lines of credit (HELOC), and a reduction in the maximum refinance percentage from 90% loan-to-value to 85%. Changes to the amortization period and the refinancing ratio will take effect March 18 and the HELOC change will take effect April 18, 2011.
Key Implications:
The change may alter the ‘quarterly profile’ of the housing market activity as some sales are pulled forward by households. Buyers who are on the fence will make their moves earlier to avoid the risk of not qualifying for a mortgage.
The impact is not expected to be large however, nor does it lead us to alter our annual forecast. Existing home sales were already forecast to weaken by about 8% compared to 2010 (this is also due to another pre-empt surge in 2010 that saw people buy before the HST kicked in on July 1st and those who took advantage of rock bottom interest rates).
The other two changes are more likely to impact consumer durables and housing-related spending. For instance, household usage of HELOCs is mostly directed towards renovations, vehicle purchases, and debt consolidation. Yet, on that front as well, the impact is not expected to be large.
Again these changes are not effective yet. They will most likely be in effect in the next few months and we will have an opportunity to better understand them and their implications before they come into effect. Saying that if you are looking or debating to get in the market now may be as good a time as any to buy or make a move, or refinance.
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