Increasing concern over rising Canadian consumer debt and in an effort to keep home buyers from being harmed when mortgage rates increase, the Canadian government has introduced new mortgage rules.

Finance Minister Jim Flaherty announced that new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80%.

Secondly, Ottawa will lower the maximum amount Canadians can borrow in refinancing their mortgages to 85% from 90% of the value of their homes.

Thirdly, Ottawa will withdraw government insurance backing on lines of credit secured by homes.
 
At a news conference in Ottawa, Mr. Flaherty said, "the measures will encourage Canadians to save more through home ownership, and they will also reduce the exposure of Canadians to financial risks".

The minimum down payment, at 5%, will remain as is. Mr. Flaherty said the government could have gone further by boosting the minimum down payment but opted not to in an effort to strike a balance. “We do not want to create any shock in the market or any sort of dramatic pressure. We want to be moderate, ” he further added.

The changes will be implemented in stages, with adjustments on amortization and refinancing limits coming into force on March 18th. Government backing on lines of credit will be removed as of April 18th.

The changes to the country’s mortgage rules emerge amid rising concern about the record levels of household debt, which measured as a ratio of money owed to disposable income nears a startling 150% as of the third quarter of last year.

The Bank of Canada recently warned debt levels are growing faster than income, and the risk posed by consumer indebtedness to the domestic economy would continue to escalate without a “significant change” in how consumers borrow and banks lend. Bank of Canada governor Mark Carney said policymakers have a “responsibility” to look at the benefits of pre-emptive action.
 
The new rules will rise mortgage payments by some $1400 a year on a typical resale home. It is less of a concern for existing home owners with little debt but it may be an obstacle for some new home buyers.
 
The Canadian Real Estate Association predicts there will be a buying frenzy as new home buyers and those who seek to refinance their property or obtain home equity loans will do so now to avoid the new rules that come into force this spring. This is anticipated not only because of the announced changes but because there is speculation that interest rates will rise over the next few months.

In the past, when changes were announced that put home buyers at a disadvantage, home sales boomed by those wanting to purchase a home before those changes became effective. If this happens it will drive home prices higher and likely be followed by a big slowdown when the rules come in.