MORTGAGES: Mortgage changes to tighten approvals

Finance Minister Jim Flaherty tightened mortgage rules this week and, in doing so, may have taken some steam out of a housing market that has seen prices and sales activity rise rapidly over the last year.

For most consumers, the changes are unlikely to make it more difficult to get a mortgage, but it could reduce the size of that mortgage.

Mr. Flaherty's changes apply to any mortgage backed by Canada Mortgage and Housing Corp. (CMHC).

But Craig Alexander, deputy chief economist at TDBank Financial Group, said the practical effect of changes to CMHC-backed mortgages is that lenders tend to extend at least some of those provisions to all mortgages.

In his view, that means those who qualified for a mortgage under the old rules should still be able to get one, but may not be able to borrow as much and, as a result, might have to look at buying slightly less expensive properties.

That trend -- forcing consumers to look at less expensive properties -- could end up softening the sharp year-over-year price increases that have been characteristic in many cities recently. The Canadian Real Estate Association says that, in December, the average selling price of a home in Canada was a little more than $337,000, a jump of nearly 20% from the same month a year earlier.

The change most likely to affect most borrowers will be a new credit test for any CMHCbacked mortgage.

Previously, a lender wanted to ensure a borrower could make the monthly payments on a three-year fixed-rate mortgage. Now, they will want to see that a borrower can afford a five-year fixed-rate mortgage --even if the borrower plans to take out a mortgage with different terms that could result in a lower monthly payment.

Those refinancing a mortgage can borrow up to 90% of the asessed value of their home, down from 95%. The intent is to prevent a homeowner from carrying a mortgage worth more than the home itself.

Investors will now have to put up 20% of the purchase price instead of 5% to get a government-backed mortgage to buy any property that is not his own residence.

Rules go into effect April 19, but lenders are likely to begin enforcing most of these measures immediately.

(prepared by David Akin/National Post)