Whether or not the new mortgage rule changes are good for the Canadian economy really depends on who you talk to. But the Bank of Montreal is pointing to higher home prices in May, and saying that because the housing market isn’t correcting on its own, these new rules will help us make a soft landing.
BMO looks at the Home Price Index, which shows that overall, Canadian home prices rose by 0.7 per cent in the month of May. Those stats were led by Calgary mortgages, which climbed 1 per cent; Toronto mortgages, which increase 0.9 per cent; and Vancouver, where the price of a home raised 0.6 per cent on average, despite the fact that things actually are beginning to cool in this market.
Sal Guatieri, Senior Economist at BMO Capital Markets said in regards to the Home Price Index and the new mortgage rules, “The new rules, which limit the availability of insured mortgages to amortizations of 25 years or fewer and to homes worth less than a million dollars, will curb demand and thus dampen prices. By our estimate, to neutralize the impact on mortgage payments of the amortization rule change, average home prices would need to fall about 3 per cent. By helping to cool the market now, the rule changes should increase the odds of a soft – rather than hard – landing.”
The fact that insured mortgages have been reduced to 25 year amortizations effective July 9 certainly will help bring a correction to many markets, and will keep any bubble from getting too far off the ground. And it’s not surprising that BMO thinks the lower amortizations are a good thing, as they’ve had their own promotions going on for 25-year amortizations. Laura Parsons, mortgage expert at BMO, echoes the sentiments of Mark Carney, calling the new changes “prudent and timely.” Ms. Parsons also says that lowering the amortization will help Canadian homeowners deal with their debt; and it will also help new homebuyers be mortgage-free faster.
“The math is simple – the shorter the life of the mortgage, the less you pay interest,” says Ms. Parsons. “An amortization of 25 years or fewer also allows Canadians to build equity in their home sooner, which ultimately helps homeowners throw a huge mortgage burning party sooner and put more money towards other financial priorities, such as post-secondary education expenses or retirement.”