Finance Minister announces Federally Regulated changes to Mortgage Loans

Finance Minister Jim Flaherty brought the hammer down today, in a pre-emptive strike of sorts, answering critics who are increasingly nervous about growing Canadian household debt.

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With the taxpayer, and the average Canadian debt holder in mind, Flaherty announced federally regulated changes to mortgage loans, intended to introduce new controls and restrictions on lending, and taking some fear out of the future, in terms of borrowing.
Flaherty said at a news conference: “The main reason we’re taking the action is for the longer term, that we avoid even the beginning of the development of the kinds of issues in some other countries that have been very damaging to families.’

Changes include the shortening of amortizations; Ottawa will no longer back mortgages with amortizations that extend beyond 30 years. They will no longer qualify for government backed mortgage insurance. Similarly, the federal government will be withdrawing its’ support of Home Equity Lines of Credit, (HELOC).

There are also changes for equity withdrawal, when homeowners are refinancing.  Previously, homeowners could withdraw funds up to 90 % of the value of their home.  Now they can only go up to 85%.

This is the second change to mortgage lending rules in the last two years- signalling an aggressive stance from the government not to leave household debt to chance. There is speculation that interest rate hikes are in the future, and the government is acting on concerns over what higher interest rates could mean for Canadians in terms of managing their own debt load, especially as debt levels are growing beyond incomes currently.

These new mortgage rules will take effect in March 2011, with the new rules for the HELOC taking effect later, in April 2011.

“Taxpayers should not bear any risk related to consumer debt products unrelated to house purchases. Those risks should be managed by the financial institutions that originate and offer these products,” Flaherty said.