|Ottawa to tighten mortgage rules|
Jan 16, 2010 Grant Robertson, Boyd Erman, Tara Perkins theglobeandmail.com
Ottawa is clamping down on the mortgage market with a package of measures to deal with Canadians’ record levels of household debt.
The Finance Department is expected to announce that Ottawa will stop backing mortgages with amortization periods longer than 30 years, cutting off support for the 35-year mortgage. In addition, the announcement by Finance Minister Jim Flaherty is also expected to reduce government backing for home equity lines of credit.
The Conservative government would not comment on the subject of the expected Monday announcement but details were confirmed by sources familiar with Ottawa’s plans.
Bank of Canada Governor Mark Carney, the superintendent of bankruptcy and other officials have said in recent months that Canadian households need to shore up their finances in case of a rise in interest rates. 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.
In addition to cutting mortgage terms, Ottawa is also expected to take 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 Corporation offers to the lines of credit.
The government is also planning a 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 expected to reduce 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.
It’s not the first time the Conservative government has tinkered with the mortgage market. In 2008, Mr. Flaherty announced Ottawa would no longer back 40-year amortizations, with a goal of cooling down a hot real estate market and preventing the emergence of a housing bubble in Canada. At that time, the government said it would also back only mortgages where the buyer has put down at least 5 per cent, effectively eliminating zero-down mortgages.
Last February the Finance Department lowered the maximum amount Canadians could withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. Mr. Flaherty also introduced a measure requiring borrowers to qualify for a five-year fixed-rate mortgage, even if they sought a variable mortgage at a lower rate. Until that change, homebuyers only had to qualify for the higher of either a three-year fixed-rate or variable-rate mortgage.
Ottawa’s concerns about home equity was renewed by statistics published late last year that showed the debt levels of Canadian households have risen to record levels. The average debt per household, including mortgage and credit card debt, reached $96,100 in 2009, while household debt reached 146 per cent of personal disposable income. That trend has been driven by borrowing on mortgages, as well as consumer debt such as credit cards.
A rise in interest rates, or further job losses, could put the economic recovery in peril, given the high debt load of consumers. Officials with the Ministry of Finance began meeting with the banking sector in the fall, during pre-budget consultations.
Ottawa's recent actions have been moving policy in the opposite direction that it was headed prior to the U.S. subprime crisis. As the subprime crisis morphed into an economic recession, the federal government took steps to make it easier and cheaper for banks to lend mortgages in Canada in order to keep credit flowing and the economy strong. In 2006, the maximum amortization period in Canada was extended to 40 years from 25. Now the government is trying to cool a market that it helped to fuel.
With a report from Bill Curry
You may help and contribute by posting your thoughts and adding comments to all articles. The Forum actively encourages your voice at any time. All opinions are appreciated.