Jim Flaherty Tuesday announced tighter lending standards for mortgages, saying that while the housing market is “healthy” the moves are needed to “help prevent negative trends from developing.” Under the new rules, all borrowers will need to meet standards for 5-year fixed-rate mortgages regardless of whether they’re seeking a loan with a lower rate and shorter term.
Also, the government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent, and requiring a 20 per cent down payment for government-backed mortgage insurance on “speculative” investment properties.“There are no definitive signs of a housing bubble,” Mr. Flaherty said. “We think we’re being pro-active in the three steps we’re taking today.”
Frank Techar, the President of Personal and Commercial Banking for BMO Bank of Montreal, welcomed the announcement.“While we do not believe that Canada faces a housing bubble, we fully support the minister’s actions,” Mr. Techar said in a statement. “Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent. Currently, we require high ratio mortgages to be able to qualify using the 5 year rate.”
In a release, the finance department indicated that the three new changes to the mortgage insurance guarantee rules are intended to take effect April 19, 2010. In reference to the tightening of re-financing rules, Mr. Flaherty said this will encourage Canadians to build equity in their homes instead of tapping that equity as a source of cash. “This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up. We are encouraging people to build equity over time, using home ownership as an effective way to save, rather than as a vehicle for quick cash,” he said.
In his comments on the third measure, Mr. Flaherty said the hike in minimum down payments for such properties will help keep prices from climbing too high. “We will require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation. This will discourage the kind of reckless real estate speculation that can drive prices to unsustainable levels which does not serve Canadian home buyers,” he said. “We’re not aiming here at investment properties,” Mr. Flaherty added. “What we’re getting at is the speculation in multiple-condo markets, in particular.”
CIBC economist Avery Shenfeld said “these look to be very well targeted at the one area of concern that we have, which is that low rates are making larger variable rate mortgages look more affordable than they really are on a long term basis.” The moves send an appropriate message to borrowers about debt, he said. While the rules don’t take effect yet, Mr. Shenfeld suggested that the banks might begin adopting them earlier. And they could take a little bit of steam out of the market, he said. “It may be part of a cooling that we’ll see in house price appreciation,” he said. “We were pushing into house prices that were running a bit ahead of rental rates and income fundamentals – not to the point that we feared a huge house price crash, but to the point that it might be time to head-off such risks.”
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