Canada wants to slow the market
Canada changes mortgage rules to cool market
Feb 16 - Canada said on Tuesday it will bring in new mortgage rules to cool the country's red-hot housing sector, citing the need to prevent a property price bubble even as it gave assurances the market is stable.
Here are the main changes, to take effect on April 19, followed by some background on the Canadian mortgage insurance industry.
NEW RULES
* Borrowers must qualify for a five-year fixed-rate mortgage, even if they opt for a lower variable rate. Banks and insurers typically assess the borrower's gross debt service ratio -- the cost of financing their home relative to their income -- and their total debt service, which includes total debt payments relative to income. Currently, they use either the fixed-rate, or the greater of the variable rate and the prevailing three-year fixed rate.
* Lower the maximum amount a homeowner can withdraw when refinancing a mortgage to 90 percent from 95 percent of the value of the property. The government wants to encourage home ownership as a savings tool so is limiting this type of financing, which allows borrowers to lower their equity in their home.
* Increase the required down payment to 20 percent from 5 percent for insured mortgages obtained for purchasing speculative housing investments not occupied by the owner. Borrowers buying a property they intend to live in that also includes rental units will not be subject to the 20 percent rule.
* The rules that did not change, despite some speculation they might, were the maximum 35-year amortization period and minimum down payment of 5 percent for regular home buyers who plan to live on their properties.
MORTGAGE INDUSTRY
* Innovation began in Canada's mortgage industry in 2006, including longer amortization periods and higher loan-to-value ratios. Although the number of high-risk, or subprime, mortgages remains low relative to the United States, Ottawa intervened for the first time in 2008 to tighten mortgage insurance rules.
* Canadian law requires banks to obtain mortgage insurance on loans where home buyers make down payments of less than 20 per cent, which are considered high risk. The borrower generally pays for the mortgage premium, which is added to the mortgage payments.
* Most mortgage insurance is provided by the state housing agency, Canada Mortgage and Housing Corp, and is backed by the government. The government also backs private mortgage insurers' obligations to lenders, subject to a deductible. (Reporting by Louise Egan, editing by Peter Galloway)
Finance minister cracks down on speculators, tightens mortgage rules
2 hours, 8 minutes ago By The Canadian Press
OTTAWA - Finance Minister Jim Flaherty is tightening mortgage rules to crack down on speculators and discourage homeowners from taking on too much debt.
He is responding to growing concerns that Canada's housing market is overheating, although he stresses that there is no bubble in Canada's real-estate market - yet.
"There's no compelling evidence of a housing bubble, but we're taking proactive, prudent, measured and cautious steps today to help prevent a housing bubble," Flaherty said Tuesday.
The finance minister says all borrowers will need to meet stiffer criteria to take out mortgages. In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year fixed-rate mortgage - up from the current standard of three years.
He's also raising the downpayment that borrowers must pay for speculative investments. If prospective home buyers want to purchase a property where they will not be living, they will have to come up with a 20 per cent downpayment, Flaherty said.
"We're not aiming here at investment properties" such as rental units, he said. "What we're getting at is the speculation in multiple-condo markets, in particular."
And he's imposing tighter restrictions on how much money people can borrow against their houses. Instead of being able to borrow 95 per cent of the value of their property, the limit will now be 90 per cent.
"This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up," Flaherty said.
"We are encouraging people to build equity over time, using home ownership as an effective way to save, rather than a vehicle for quick cash."
The new rules are expected to come into force on April 19.
Economists have advised the minister to be stricter on who can get new mortgages, but they've also warned the government not to put on the brakes too strongly, in order to preserve the fragile economic recovery.
"These measures may have some stabilizing effect on the housing market," Flaherty said. "Stability is a good thing for a consistent economic recovery."
The Bank of Canada has been warning for months that homeowners should ensure they can absorb an increase in their floating-rate mortgages once rates start rising, likely as early as this summer.