Flaherty tightens mortgage taps

Last Updated: Monday, January 17, 2011 | 10:58 AM ET Comments583Recommend206

CBC News

Federal Finance Minister Jim Flaherty announced tighter mortgage rules on Monday to address concerns over high Canadian household debt.

"In 2008 and again in 2010, our government acted to protect and strengthen the Canadian housing market," Flaherty told a news conference in Ottawa. "We continue to do so today."

Flaherty unveiled three main changes:

• The maximum amortization period for a government-insured mortgage was lowered from 35 to 30 years.
• The upper limit that Canadians can borrow against their home equity was lowered from 90 per cent to 85 per cent.
• Government insurance backing on home equity lines of credit, or HELOCs, has been removed.

The first change is likely to have the largest impact. Buyers who purchase a home with a down payment less than 20 per cent of the value of the home are required to purchase government-backed mortgage insurance through Canada Mortgage and Housing Corporation.

Under the new rules, mortgages amortized over longer than 30 years will no longer qualify for that insurance, making it effectively impossible to get a highly leveraged mortgage of more than 30 years in Canada.

After companies began insuring mortgages of 40 years or more, Ottawa set the limit at 35 years in 2008 before Monday's move lowered it to 30.

Aims to stem tide on consumer debt

"This measure will significantly reduce the total interest payments for Canadian homeowners," Flaherty said.

He was referring to the fact that anyone taking a longer amortization on a mortgage would pay much more in interest over time.

Under current rules, a five per cent, 35-year mortgage would have a monthly cost of $1,514. When the new rules come in on March 18, a 30-year mortgage at five per cent will have a monthly payment of $1,610 — a $96 difference per month, but over the life of the mortgage, that adds up to $56,139 in savings.

Flaherty pitched the lowering of the amount that can be borrowed against home equity to 85 per cent as a move to ensure Canadians retain more equity in their homes.

"This will promote saving through home ownership and limit repackaging consumer debt into mortgages," he said.

The final change, to remove government insurance on HELOCs, came as a result of Ottawa's concern that certain financial institutions were allowing homeowners to roll too many consumer purchases into CMHC-insured mortgages.

"I think that's particularly risky because some of those loans are not used to create housing. They're used to buys boats, and cars and big-screen televisions," Flaherty said. "That's not the business that home insurance was designed for."