Flaherty tightens mortgage rules

Finance Minister Jim Flaherty has announced new rules for mortgage lending and home equity credit lines designed to rein in growing debt among Canadians.

The first of three new measures reduces the maximum amortization period from 35 to 30 years for new government-backed insured mortgages with loan-to-value ratios higher than 80%.

“This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire,” a Department of Finance press release says.

The second measure cuts the maximum amount Canadians can borrow in refinancing their mortgages from 90 to 85% of the value of their homes. “This will promote saving though home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.”

The third rule change targets home equity lines of credit, or HELOCs. The government will no longer offer insurance backing on lines of credit secured by homes, a measure aimed at “ensur[ing] that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.”

HELOCs in many cases are “used to buy boats and cars and big-screen TVs. That’s not the business mortgage insurance was designed for,” Flaherty said. (Click here to read the government backgrounder.)

Peter Drake, vice-president, retirement and economic research at Fidelity Investments, welcomed the new measures.

“I’m not very worried about the Canadian housing market. I think we need to remember, given what we’ve seen in the United States, that the Canadian housing market and the U.S. housing market, and lending in Canada and lending in the U.S., have been two completely different things. But I think this is being prudent. And I think being prudent, after what we’ve seen around the globe in the last little while, is a good idea,” Drake said.

“I think this is a case of Canadian policy setting an example for the rest of the world. And goodness knows, from what we’ve seen in the last five years, the rest of the world could use some good examples.”

Drake says the new rules serve to remind Canadians that “when you buy a house you’re taking on a long-term financial commitment. It’s reminding people also that there’s absolutely nothing wrong with borrowing to buy a house, but you pay interest on those loans.”

Comparing a 30-year and a 35-year mortgage with a principal of $300,000, at 6% interest, “the 5-year difference in amortization amounts to a difference in total interest expenditures of $69,809. It forces Canadians to take a somewhat longer-term view, and I think that’s a good thing.”

The new rules, Drake adds, will likely have an impact on available cash flows for individual investors. “In terms of monthly [mortgage] payments, they’ll spend more, and therefore might need to direct a little less of their cash flow to their investment account. But on the other hand, if you take the long term view, they’ll spend way less on mortgage interest and therefore should have more funds to save and invest.”