Concern over rising consumer debt levels is prompting Ottawa to make three new changes to Canada's mortgage rules.
Finance Minister Jim Flaherty announced Monday that new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
Secondly, Ottawa will lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.
Thirdly, Ottawa will withdraw government insurance backing on lines of credit secured by homes.
Though longer amortization periods reduce monthly payments, they greatly increase the amount of interest paid over the life of the mortgage and make it harder to build up equity.
The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 per cent interest, and the minimum 5 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.
At a news conference in Ottawa, Mr. Flaherty said the measures will encourage Canadians to save more through home ownership. He said they will also reduce the exposure of Canadians to financial risks.
Mr. Flaherty said his concern is not Canada's mortgage default rate - which is less than 1 per cent. Rather his concern is those who are borrowing as much as possible.
"We're seeing people borrow to the max, and borrowing to the max at low interest rates," he said. "Most Canadians are not doing that."
Mr. Flaherty predicted the measures will have "some moderating" impact on the housing market.
He said the changes will not take effect imediately because of a requirement to give the industry 60 days notice before making policy changes of this nature.
He said past experience suggests there is no need to fear a rush on 35-year mortgages before the new rules take effect.
In addition to cutting mortgage terms, Ottawa is taking action to reduce the rapid rise in home equity lines of credit, or HELOCs. The government will do this by clamping down on the insurance that Canada Mortgage and Housing Corp. offers to the lines of credit.
Home-equity lines of credit and loans have surged in Canada, rising at almost twice the pace of mortgages over the past decade to account now for 12 per cent of overall household debt.
The third measure that will reduce how much Canadians can draw on their home equity. Last February the Finance Department announced that it would lower the maximum amount Canadians could withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. It is now reducing that maximum to 85 per cent from 90 per cent.
Observers have been speculating that Finance Minister Jim Flaherty would take steps to tighten mortgage credit in the next federal budget. The timing of the move suggests concerns are growing in government circles about household debt and its impact on the economy.
CIBC chief economist Avery Shenfeld referred to the mortgage changes as part of a larger move by the government to “force Canadians on a debt diet” as household debt levels sit at record levels.
“Policy makers now have that credit buildup in their policy gun sights, and will use higher rates and regulatory changes to bring spending into better line with income, and cool mortgage demand,” Mr. Shenfeld wrote in an economic forecast on Monday.
“Canadians aren't on the verge of a U.S.-style default crisis – not at these interest rates, and not with debt having been granted to stronger hands than was the case before America's crisis, when subprime mortgages and credit cards were given out like candy,” he said.
