Maria Mak - Burnaby Realtor's latest mortgage update: Mortgage rules tightened as of today June 21 2012
By Maria Mak - Sut... on June 21, 2012 - 4:57pm
OTTAWA — The federal government is moving once again to tighten mortgage-lending rules amid lingering concerns about an overheated housing market and rising household debt levels.
In a decision called for by some of the big banks — and one that's expected to soften housing prices — Finance Minister Jim Flaherty announced Thursday the federal government is reducing the maximum amortization period for a government-insured mortgage to 25 years from 30 years.
It's the third time the Harper government has reduced the maximum amortization period in the last four years, after it initially increased the lengths of mortgage terms to make it easier for Canadians to purchase homes.
The government has since ratcheted it back from 40 years to 35 in 2008, and then further reduced it to 30 years in 2011.
Banks will still be allowed to offer 30-year amortization periods on low-ratio mortgages that include a downpayment of 20 per cent or more.
The changes will see the government lower the maximum Canadians can borrow against their home to 80 per cent of its value, from 85 per cent, in an effort to encourage them to keep more equity in their homes.
As well, under the new rules, to qualify for a mortgage loan Canadians can spend a maximum of 39 per cent of their gross household income on home expenses such as mortgage, property taxes and heating, and a maximum 44 per cent of income on housing expenses and all other debt.
Flaherty also announced Ottawa will limit government-backed insured mortgages to home purchases of less than $1 million.
A downpayment of at least 20 per cent will be required on mortgage loansfor homes priced at or above $1 million.
Reducing the amortization period will increase monthly payments, but reduce the amount of total interest paid on a mortgage. Ottawa expects the change from a 30-year to 25-year amortization will, on a $350,000 mortgage loan at four per cent, increase the monthly payment $177 but reduce total interest costs by nearly $47,000.
The government believes less than five per cent of home buyers will be affected by the clampdown.
The new rules take effect July 9, 2012.
"We watch carefully, we monitor the market carefully. I remain concerned about parts of the Canadian residential real estate market, particularly in Toronto, but not only in Toronto, so that is why we are intervening once again," Flaherty told reporters in Ottawa.
"It's our job to try to be ahead of things and act in a measured way, listening to the market. And I have been listening to the market, and quite frankly, I don't like what I hear, particularly in the condo market."
Flaherty said the government's moves are part of an effort to "moderate behaviour" among Canadian homeowners and make them reflect before jumping into the housing market at the high end.
Canada's largest city is seeing continuous home building because of persistent demand, he noted, which is accelerating prices and eroding affordability.
"This concerns me because it's distorting the market, quite frankly," the minister added. "My judgment is that we need to calm particularly the condo market in a few Canadian cities."
Statistics Canada reported last week that the ratio of Canadian household debt-to-income continued increasing in the first quarter, to 152 per cent from 150.6 per cent in the fourth quarter of 2011. That came on the heels of a warning from the Bank of Canada that high
household debt levels remain the most important domestic risk to financial stability.
Opposition parties said Thursday the Harper government, with its changes to mortgage rules, is simply retreating from its own decision to ramp up the amortization to 40 years after taking power in 2006.
"This is Mr. Flaherty versus Mr. Flaherty. He has done all of this. He's the guy who has let it go up and is now bringing it dramatically down again. We are now at the same situation we were — what do you know, 2006 — where we had 25-year mortgages," said interim Liberal leader Bob Rae.
"There's going to be a real issue as to exactly what message this is sending to markets and what impacts it will have."
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.
Some of the big banks suggested at the time the federal government consider implementing "measured actions," such as reducing the maximum amortization period for government-insured mortgages back to the traditional 25 years.
On Thursday, the banks largely welcomed the measures.
"Overall we see (Thursday's) announcement as a much better substitute to interest rate hikes since the moves are aimed with almost surgical precision at the margins of the mortgage market," Benjamin Tal with CIBC World Markets said in a research note.
"The combined impact of the four changes will not be large enough to derail the housing market, but are clearly significant enough to soften activity, and at the margin will act as a negative for house prices —mainly at the mid-range segment of the market."
Frank Techar, president of personal and commercial banking at BMO Financial Group, called the changes "prudent, measured, responsible, timely."
"Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada's housing market experiences a soft landing," Techar said in a statement.
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