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New Mortgage Rules Announced

OTTAWA – Ottawa is tightening mortgage rules to make it harder for people to buy or borrow on their homes.

Finance Minister Jim Flaherty said Thursday that he will once again cut the maximum amortization period for government insured homes to 25 years from the current 30 years, and will also limit how much homeowners can borrow on the value of their homes to 80 per cent from 85 per cent.

Those are not the only changes the government is making. It will no longer be in the business of insuring homes that are worth more than $1 million — meaning buyers will need to put up at least a 20 per cent down payment or seek private insurance.

As well, it will insist that prospective buyers have the means to afford mortgage payments, property taxes and heating costs on their home. It will do so by setting cost ratios based on household income — a kind of affordability ratio — of 39 per cent for gross debt service and 44 per cent for total debt service.

But the most significant change is reducing the amortization period, the fourth time Flaherty has done so since economic difficulties and tumbling interest rates started becoming a major driver of the housing market. At 25 years, it is now back to where it had been historically before the Harper government began raising the period after taking office in 2006.

The government says the changes mean that about five per cent of Canadians who might be considering buying a new home will likely no longer qualify.

“It’s a question of trying to moderate behaviour and I hope Canadians will reflect before they jump into a market at the high end,” he said.

“It will mean that some people will not buy into the market, it will also mean that some people will buy less into the market, they’ll buy a less expensive home or less expensive condominium. Good. I consider that desirable.”

The latest move is part of a series of initiatives undertaken recently by the federal government to slow the accumulation of debt by Canadian households, which reached a record 152 per cent of income in the fourth quarter of last year.

Later in the day, the Office of the Superintendent of Financial Institutions will be weighing in with new rules on lenders designed to keep marginal borrowers out of the credit market.

Flaherty said the changes will likely impact Canada’s economy, but would not reveal his department’s calculations of the hit on growth in terms of house construction and jobs that the changes may exact.

The moves come as trouble is looming on the horizon for the world economy, and by extension, the Canadian economy. Economic indicators coming out of Europe, China, other emerging countries and the United States have largely pointed to slower than expected growth.

As well, Europe’s debt crisis continues to pose an ever-present danger to the global recovery.

Under these circumstances, economists say Bank of Canada governor Mark Carney is unlikely to be in a position to raise interest rates to slow borrowing in Canada’s housing market, something Flaherty hinted at during his morning news conference.

That leaves any action that can be taken to the government.

“I’m very mindful of the world situation and this is a challenge for us,” Flaherty said. “I’m concerned obviously that we may get a shock from Europe.

“We encouraged, the prime minister did and I did, we encouraged our European colleagues to act with some alacrity, and I hope they do. If they don’t, it’s going to be a very difficult summer.”

Flaherty said his decision to act was a “judgment call” based on observations of the housing market by both himself and his officials, saying his biggest concern is with the condominium situation in Toronto, and to a lesser degree Vancouver, Montreal and Quebec City.

“In Toronto in particular, what I’ve observed and heard about is continuous building without restriction because of persistent demand. This concerns me because it is distorting the market,” he said.

Thursday’s initiatives likely have the full backing of the Bank of Canada. Carney has been warning for several years that some Canadians are getting in over their heads with debt and that they could face problems once interest rates — which sit at historic lows — start rising or if there is a second economic crisis.

Recently, the Bank of Canada estimated that the number of households in arrears could almost triple to 1.3 per cent if the unemployment rate were to rise by three per cent, about the same as occurred in the 2008-09 slump.

But the central bank has resisted raising interest rates — which would discourage borrowing — fearing such a move would damage a weak economy and raise the value of the loonie.

Instead, Carney has suggested that the best approach would be to specifically target the real estate market through changes to mortgage rules.

Not all economists have been calling for a clampdown.

In a report Wednesday, CIBC deputy chief economist Benjamin Tal noted that consumers are tapped out and that credit growth is slowing despite historically low interest rates meant to encourage borrowing and stimulate the economy. As well, home prices and sales have been trending lower in recent months, with a few exceptions, in particular the still hot condo market in Toronto and to a lesser extent Vancouver.

Given the weak economy, Tal predicted the Bank of Canada may need to keep low interest rates in place until 2014.

But some analysts have also warned that moving too quickly to pour cold water on an already cooling housing market may deprive the economy of one of the few areas of strength.


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