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(John Woods/John Woods for The Globe and Mail)
(John Woods/John Woods for The Globe and Mail)

Economy Lab

Will mortgage rules add chill to a cooling market? Add to ...

Just a few days ago economists gushed that the Canadian housing market had achieved a soft-landing - cooling off without crashing and returning to relative normalcy after a year of explosive growth.

That hasn't stopped the federal government from stepping in to make sure it stays that way. Changes to the mortgage rules - including a move to maximum 30-year amortizations instead of 35 years, and caps on home equity borrowing - will squeeze more marginal buyers out of the market.

More related to this story

It's already happened once - last year the Feds made it more difficult to qualify for a mortgage by forcing all borrowers to qualify at the five-year fixed rate, instead of the usually lower variable rate.

In practical terms - the changes to amortization lengths would add about $1,300 a year to the typical mortgage. Not huge, but enough to make someone think twice if they were already unsure if they could afford their new purchase.

The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 per cent interest, and the minimum five per cent down payment of $17,227, a 35-year mortgage would have monthly payments of $1,441. Shorten the amortization period to 30 years, and the monthly payment increases to $1,555.

How much immediate effect that will have isn't entirely clear, of course, because there hasn't really been much evidence that Canadians are abusing longer amortization periods. The Canadian Association of Accredited Mortgage Professionals released a study late last year that showed 22 per cent of Canadians have mortgages with amortization rates exceeding 25 years, compared to 18 per cent the year before.

But the changes aren't necessarily targeted at today's market - the government wants to make sure Canadians are not taking advantage of record low interest rates to splurge on houses they won't be able to afford when rates inevitably start rising again.

Of course if this move proves heavy handed and freezes an already cooling market, interest rates will be the last thing those trying to sell homes will care about. They'll be more interested in finding out where all the buyers went.



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