Acknowledging his concern that Canada’s housing market is overheating, Finance Minister Jim Flaherty is clamping down with four changes to mortgage insurance rules.
At a news conference in Ottawa, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years. Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent.
In an effort to ensure taxpayer-backed mortgages are not going to wealthy Canadians, the availability of insured mortgages will be limited to homes with a purchase price of less than $1-million.
And lastly, there will also be a new rule aimed at ensuring the size of a loan is not too big in comparison to household income. The maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.
The changes will take effect on July 9, 2012.
“We want people to make sure that when they purchase the most important purchase they’ll probably ever make in their life, that they do so in a prudent way. And some calming of the market is desirable,” said Mr. Flaherty.
The minister said his department has conducted an analysis of the expected impact the changes will have on the Canadian economy, but he only provided some of that detail.
He said Ottawa expects that less than 5 per cent of new home purchasers will be affected by the changes. That means some people will choose not to buy a home.
“It will also mean that some people will buy less into the market, so they’ll buy a less expensive home or a less expensive condominium. Good. I consider that desirable,” he said. “So if it has that kind of a cooling effect, that to me is a good thing.”
Though Canada's big banks were caught off guard by the mortgage changes when word of the adjustments emerged late Wednesday, some lenders said Thursday they support the changes.
"Canadian household debt levels have reached levels that raise concern,” Tim Hockey, head of retail banking at Toronto-Dominion Bank said.
The government's moves "take direct aim at the issue and they should have a substantial moderating effect on the growth of Canadians' debt levels," Mr. Hockey said.
Bank of Montreal called the changes prudent and responsible.
"The new measures will support the long-term stability of the Canadian housing market," said Frank Techar, head of personal and commercial banking at BMO.
"Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada's housing market experiences a soft landing."
One of the issues driving Mr. Flaherty's concern is the continued construction of condos in larger cities and the fact that prices continue to rise in spite of this added supply. He said this is a particular concern in Toronto, but he also mentioned Vancouver, Montreal and Quebec City.
While Mr. Flaherty would not comment directly on expectations that the Bank of Canada will keep interest rates low for some time, he did note that the U.S. Federal Reserve is not expected to raise interest rates as it tries to stimulate the U.S. economy.
That leaves changes to mortgage policy as one of the available tools for Ottawa to use in order to dissuade Canadians for taking too much advantage of ultra low rates and piling on debt that could become unaffordable at higher interest rates.
“It’s just a question of trying to moderate behaviour and I hope that Canadians will reflect before they jump into a market at the high end,” said Mr. Flaherty.
Several Canadian banks had been urging Ottawa to tighten mortgage rules and the minister had previously stated that there was nothing stopping the private sector lenders from tightening the rules themselves.