New Federal Mortgage Rules Set to Increase Sales Activity.

New rules announced by the federal government today will make it somewhat more difficult to get financing for home purchases and refinancing. The three new rules, which take effect April 19th place more stringent controls on mortgage qualification:

1. requirement that borrowers have the resources to qualify for a five-year fixed-rate mortgage even if they decide on a lower-cost variable rate mortgage. Typically 5-year fixed rates are higher than variable rate mortgages. This will have the effect of reducing the total amount that one could qualify for.
2. lowered maximum amounts that can be withdrawn when borrowers refinance mortgages. The maximum will now be 90 percent of the value of the home, down from 95 percent.
3. Ottawa will also require a minimum down payment of 20 percent for insured mortgages tied to nonowner-occupied properties that are being bought for speculation. The existing rules allowed investors to put down as little as 5% of the value of a property. This will effectively reduce the number of speculators and investors purchases.

As real estate values and activity have been exceptionally strong since mid 2009, the feds were concerned of an impending housing bubble. With the rest of the economic recovery still quite weak, the Bank of Canada is not wanting to slow the housing market through rate increases as it would have a detrimental effect on the rest of the economy.

The short term effect of these new rules will be a flurry of activity as consumers take advantage of the existing rules until April 19th. Though property inventory levels were starting to build slowly since December 2009, this increased buyer activity will surely deplete inventory levels again which will push prices higher. I anticipate inventory levels to remain low throughout most of 2010.

There are still a number of other rule changes that the feds can implement to put the brakes on the housing market but have for the time being, not implemented them. For example, they could increase the minimum down payment requirements from the current 5% (insured) and 20% (conventional). They could also reduce the maximum allowed amortization period from its current 35 years.