Federal Finance Minister, Jim Flaherty, announced a further tightening of Canadian mortgage regulations, suggesting that “concerns are growing in government circles about household debt and its impact on the economy,” according to a report in the Globe and Mail.
The changes to the federal mortgage regulations (which will not take effect immediately, as the government is required to give the mortgage industry 60 days notice of rule changes) are three-fold:
- The maximum amortization period for government-insured home mortgages with loan-to-value ratios in excess of 80 per cent will be reduced from 35 years to 30 years.
- The maximum amount that Canadians with government-backed mortgages can borrow when refinancing their mortgage will be reduced from 90 per cent to 80 per cent.
- Home equity loans and home equity lines of credit (HELOCs) will no longer qualify for government-backed mortgage insurance.
In announcing the regulation changes, Mr. Flaherty told reporters that the tightening of the mortgage rules is intended to reduce the exposure of Canadians to financial risks and to promote overall savings through homeownership.
Of the three changes, the one that is likely to have the greatest impact is the withdrawal of federal insurance backing for HELOCs. “Home-equity lines of credit and loans have surged in Canada,” the Globe and Mail observes, “rising at almost twice the pace of mortgages over the past decade.” HELOCs now account for 12 per cent of overall household debt, according to the Globe.
CIBC chief economist Avery Shenfeld characterized these changes to Canada’s mortgage rules as one part of an overall government strategy to “force Canadians on a debt diet” as household debt levels continue to sit at record levels.
The rules changes are not, however, an indication that government officials or industry analysts are concerned about a housing meltdown like that which continues south of the border. “Canadians aren’t on the verge of a U.S.-style default crisis,” Mr. Shenfeld wrote in his most recent economic forecast, “not at these interest rates, and not with debt having been granted to stronger hands than was the case before America’s crisis, when subprime mortgages and credit cards were given out like candy.”
