The federal government tightened mortgage restrictions to get a hold on Canada's runaway household debt.

Ottawa-Canada Finance Minister Jim Flaherty has moved on Monday to tighten up the mortgage rules for the second time in less than a year, the new rules are meant to tackle growing household debt in Canada.“We are seeing people borrow to the max,” he said. ” The new rules are to prevent the kind of housing market problems that led other countries into financial crisis

The measures taken by the Government are to ensure Canadians don't take on more debt than they can handle the Government put new restrictions on borrowing against the value of a home the use of lines of credit secured by homes and Reducing the Amortization period, allowing Canadians to pay off their homes more quickly.

Ottawa moved to 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.
This will prevent Canadians from taking on excessive debt,” Flaherty told a news conference, noting that Canadians in some cases are remortgaging their homes to buy boats and other large ticket items instead of reinvesting in their homes.

The Finance Minister also withdrew government insurance backing on lines of credit secured by homes, such as home equity lines of credit He explained this will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

The Government also moved to reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent “Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” Flaherty said. “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future,” he said.

South of the border, many U.S. homeowners borrowed and refinanced mortgages against the rising value of their houses to fund spending in the run-up to the global recession.
Recent data from Statistics Canada shows Canadian household debt has risen to a record C$6.1 trillion, or 148 percent of disposable income

Finance Minister Jim Flaherty, also warned that Canadian interest rates were bound to go up, said the new measures would "have some moderating effect on the (housing) market."

"The main reason we're taking the action is for the longer term, that we avoid even the beginning of the development of the kinds of issues that have happened in some other countries, that have been very damaging to families," Flaherty said.


Canada's housing market avoided the meltdowns seen in the United States, Britain and Ireland during the global recession.  Resale prices dropped in 2008, But thanks to low mortgage rates they rebounded sharply the following year, that made it easier for customers to borrow money. This sparked a rise in borrowing that has alarmed some policymakers.

The opposition New Democratic Party said the government should be focusing on job creation and not scolding Canadians on how to spend their money.

"Household debt is a result of the high cost of living, not big-screen TV purchases... Try paying your housing and heating bills on a precarious part-time job," the party said in a release.

The new rules taken by the government are the latest in a line of measures the government has taken to cool the housing Market, while insisting that it sees no signs of a housing bubble.

In February 2010, the government last round of changes included requirements that borrowers who choose variable rate mortgage, must have the resources to qualify for a five-year fixed-rate mortgage.

The last round of changes, combined with higher interest rates, helped cool the housing markets from its red-hot pace of a year ago. Many analysts now describe the market as balanced.
The real issue here is that buyers entering the market won't be impacted negatively by this announcement. Refinancing impacts borrowers who are in their present homes as it directly targets people's indebtedness, but it shouldn't take real estate transactions off the table.

The actual impact will likely be smaller than the message, The measures announced to limit the amortization periods to a 30-year limit is sustainable, and will probably not affect the majority of borrowers, as most borrowers tend to choose lower Amortization period.

The effect won't be that great. At 4.5% interest rate it amounts to about C$100 (a month) more on 30 year Amortization period vs.35 years Amortization period on a C$300,000 mortgage, I don't expect the new regulations to have a massive effect on the Housing market. With expectations of higher interest rate, a slowdown had already been expected, as for Canadian banks it may add up to a slowing of personal loan growth.
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