INTEREST RATES: New mortgage rules increase the qualifying interest rate by about one percentage point

Many of us have been enjoying supremely attractive interest rates on mortgages. However, with rates having been at historic lows for quite some time and with the economy heating up, the only direction rates will go from here is up. The finance minister wants to ensure borrowers are in good financial shape to withstand rate hikes, which are expected to hit this summer.

Finance Minister Jim Flaherty announced that by April 19 new mortgage criteria will apply. Lenders will now be testing whether buyers can afford a mortgage using a higher interest rate. The new rules apply to mortgages backed by government insurance, a requirement when there is less than a 20% deposit.

"What will tend to happen is that the same practices will cascade through the entire financial system. So when borrowers come in to take out mortgages, they all will be tested against the five-year posted rate," says Craig Alexander, deputy chief economist at TD Bank Financial Group. "It increases the qualifying interest rate by about one percentage point."

The higher rate will be used just for the qualifying process -- it does not mean your mortgage rate will be higher -- at least not right now.

("The Flaherty Effect" prepared by Helen Morris/National Post)

"Any mortgage professional that's worth their salt is sitting down with their client already and saying, 'Can you afford a 1% or 2% rate increase?' " says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. "We tend to want to have those customers looking forward. If they're stretched to their maximum at today's low interest rates, then there could be some financial considerations two years down the road if indeed they have to take a look at higher interest rates."

So, if there's an April 19 deadline, won't that make it more tempting to try to get a mortgage now?

"Folks shouldn't rush to buy; you don't want to get caught up in the potentially emotional period that might go on between now and April 19. If you can wait, I would suggest waiting," says John Turner, director of mortgages, Bank of Montreal. "It's important for the potential consumer to sit down with their banker and get prequalified. They want to lock in their interest rate so they can take their time and make the right decision. They want to make sure that they can afford the house that they are buying."

Mr. Alexander says about one-quarter of those looking to purchase a home will likely be affected by the new rules and may have to settle for a smaller home, but he estimates only 4% or 5% will not buy because of the tighter qualification process.

Under the new rules, existing homeowners will only be able to withdraw 90% of the value of their homes when refinancing, down from 95%.

"People who would be looking for [high refinancing] are probably in some sort of financial strife already, so it's probably something they shouldn't be doing," Mr. Rawson says.

The third set of property owners in Mr. Flaherty's sights are those looking to invest in rather than live in a home.

"People buying a property they are not going to live in now have to put 20% down; before, it was 5% down. That's a really big change," Mr. Alexander says. "That measure is really aimed at speculators. The government said specifically the objective was to diminish speculation in the marketplace."

The new requirement may affect the Toronto condo market, Mr. Alexander says.

"Demand growth will probably be tempered by some of these new rules. ... If there were people looking to buy a couple of extra condo properties as an investment ... it doesn't mean people can't do it but if you're going from 5% to 20%, instead of buying four properties with the same amount of money, maybe you end up buying one."

The new rules plus more new condos coming on stream may cool the market, Mr. Alexander says, but adds that the Toronto real estate market remains fundamentally strong with demand boosted by immigration.