Blog › June 2012

Ottawa Tightens Lending Rules

OTTAWA — The federal government is moving once again to tighten mortgage lending rules, announcing Thursday it’s reducing the maximum amortization period for a government-insured mortgage to 25 years from 30 years.

The decision follows warnings from banks about an overheated housing market and rising household debt levels.

The changes, announced by Finance Minister Jim Flaherty, are the fourth time the government has reduced the maximum amortization period in the last four years, ratcheting it back from 40 years to 35 in 2008, and then further reduced to 30 years in 2011.

Reducing the amortization period will increase monthly payments, but reduce the amount of total interest paid on a mortgage.

Click here for the federal government’s official statement

The government expects less than 5% of home buyers will be affected by the changes.

The change will lower the maximum Canadians can borrow against their home to 80% of its value, from 85%, and fix the maximum gross debt service ratio — the amount of household income available for mortgage payments — at 39% and maximum total debt service ratio at 44%.

Flaherty also announced Ottawa will limit government-backed insured mortgages to home purchases of less than $1 million.

The new rules take effect July 9, 2012.

“Our government stands behind the efforts of hard-working Canadian families to save by investing in their homes and their future,” Flaherty said in a news release. “The adjustments we are making today will help them realize their goals, build on the previous measures we have introduced to keep the housing market strong, and help to ensure households do not become overextended.”

Flaherty and some of the country’s leading economists have for months been warning that they remain worried about Canada’s housing market and rising household debt.

In March, prior to delivering the federal budget, Flaherty met with 13 private-sector economists for his traditional pre-budget consultation to get their assessment of the Canadian economy.

The finance minister and a handful of the economists said at the time they remained concerned about household debt levels in Canada and a somewhat overheated housing market — especially on condominiums.

Then, as now, some of the big banks suggested the federal government consider implementing “measured actions,” such as reducing the maximum amortization period for mortgages back to 25 years.

Avery Shenfeld, chief economist with CIBC World Markets and one of the handful of banking officials cautioning Flaherty about the Canadian housing market, said at the time there was “a general feeling that, more than just the condo market, the Canadian housing market is starting to get a little bit overdone in terms of price momentum.”

Derek Burleton, deputy chief economist with TD Bank Financial Group, also warned the minister about the state of the Canadian housing market and wanted the government to consider reducing the maximum amortization period down to the traditional 25 years from the current 30 years.

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