Source: The Canadian Press

Courtney Ferguson bought her first condo last week with a mortgage that assumes a 35-year payback period — enabling her to buy in pricey downtown Toronto and still leave a buffer against interest rate hikes.

“It’s a bit of a relief that I’ll have a little bit more of a disposable income than if I only had a 30-year amortization,” she said.

The 26-year-old nurse was one of the last Canadians to sign up for the 35-year mortgage amortization before Finance Minister Jim Flaherty announced that will no longer be an option for new homeowners.

Beginning March 18, the maximum amortization period for a mortgage will drop to 30 years for new, government-backed mortgages with a down payment of less than 20%.

The measure, aimed at changing Canadians’ borrowing habits, effectively reduce the maximum amount Canadians can borrow for their first home.

The rule changes don’t just target those spending beyond their means, but buyers like Ferguson, who passed up her maximum allotment to opt for something a little smaller, but within her means.

She has yet to decide what term to take but is leaning towards a five-year fixed rate, meaning the interest rate and other details of her contract would be stable for the first five years.

“I’m sure people are going out there and getting houses that are a little out of their budget because of the 35-year amortization, but for myself I just wanted the safety,” Ferguson said.

Real-estate and mortgage professionals warned that the mortgage rules will curb borrowing from first-time buyers, which could put a chill on an already slowing housing market.

Those who enter the market after the March deadline will see increases similar to a rise in mortgage rates, but mortgage holders will pay more toward their principal payment rather than simply paying more interest.

For example, someone paying 4% interest on a $300,000 mortgage would pay $105 more each month — but actually reduce interest payments by $42,288 over the life of a mortgage because it’s repaid five years sooner.

Ottawa will also reduce the limit on how much Canadians can borrow using their homes as equity to 85% of the total value from 90, which curbs how much homeowners can use house collateral to borrow for other purposes.

In addition, the government will stop insuring home equity lines of credit — an alternative to credit cards and term loans that use the property’s value as collateral –which should put pressure on banks to increase their standards when it comes to deciding who qualifies for such loans.

The new rules do not apply to those who secure those products before the deadline, meaning the real-estate market could see an upswing during the usually sleepy winter season.

The prospect of a sharp spike in sales followed by a potential overcorrection troubles Randall McCauley, vice-president of government relations at the Canadian Real Estate Association, who questioned whether the reforms are necessary given that CREA has already seen a deceleration in mortgage debt as previous measures take effect.

“We understand what the government’s doing here; the government is basically saying ‘don’t use your house as a piggy bank’,” he said.

“(But) we’re not sure the government needed to take this step now.”

Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals, said the changes are more severe than his industry would have liked.

His association had suggested that Ottawa tighten qualification standards for 35-year mortgages, rather than abolishing them altogether.

“There are a lot of Canadians who take out a longer amortization not because they are tight to qualify but because they want flexibility in terms of their finances,” he said.

Paula Roberts, a mortgage broker at Mortgage Intelligence, said the changes to refinancing and amortization could limit consumer choice for those who were responsibly benefiting from the options.

For example, a 35-year amortization gives homeowners the cushion necessary when rates rise because monthly payments are lower over a longer period of time.

Roberts said she encourages clients who take on the 35-year mortgage to make payments for a 30-year mortgage, but likes them to know they have a buffer if personal finances change.

In addition, she said, the changes to refinancing limits could have the opposite of the intended effect and encourage those who are already in debt to borrow on credit cards or other lending options that have high interest rates rather than keeping more debt in a relatively low-cost mortgage.

“If a client is pulling out equity to purchase another property or to purchase investments and they’re investing in their future and their wealth, then they’re not going out and blowing it,” Roberts said.

Consumer debt has become a growing concern for government officials and economists, especially after data emerged in the fall showing Canadian debt-to-disposable income ratios now hover around 148%.

That means Canadians owe $1.48 for every dollar of disposable income — what’s left after mandatory government payments like taxes.

The situation has put Bank of Canada governor Mark Carney is somewhat of a bind; low interest rates are still required to prop up the Canadian economy, but they are also encouraging consumers to take on big loans.

The Bank of Canada is scheduled to make its next policy rate announcement Tuesday, but is not expected to raise rates because inflation seems under control and many economic uncertainties linger — from a strong Canadian dollar to European debt.

Bank of Montreal senior economist Michael Gregory said the changes announced Monday should take some pressure off the central bank to raise interest rates.

“They don’t have to resort to policy rate hikes as readily to address high and rising household debt burdens, which would have dampening impacts well beyond just the housing sector.”

It’s the third time in just over two years that the government has moved to tighten mortgage rules to curb consumer borrowing.

The maximum amortization was reduced in October 2008 from 40 years to 35 years, when the government also raised the minimum down payment from zero to 5%.

Last February, Flaherty announced that mortgage holders who wanted to qualify for an insured mortgage had to meet the standards for a five-year fixed-rate mortgage even if the interest they paid was lower.

The maximum refinance allotment was also brought down from 95% last spring.

Those rule changes, in combination with the anticipation of interest rate hikes and the implementation of the HST in B.C. and Ontario pushed real estate sales ahead into the first quarter of 2010.