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Finance Minister Jim Flaherty unveiled changes Monday morning to mortgage lending rules that would see Ottawa stop backing home loans greater than 30 years and make it more difficult for households to use their property to access financing.
The changes, as reported by the National Post on Sunday, emerged as worries escalate among Bay Street leaders and the Bank of Canada about the record levels of household indebtedness, and how conditions could deteriorate unless pre-emptive action was taken.
"We want to make sure we don't have the kind of medium-term problem that has been experienced elsewhere because of this tendency by some to assume large indebtedness at low interest rates," Mr. Flaherty said. "People need to demonstrate that good Canadian trade of prudence and reasonableness in terms of their debt assumptions."
Mr. Flaherty said mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20% down payment on a home. The previous limit was 35 years.
Also, Mr. Flaherty lowered the maximum amount Canadians can borrow against the value of their homes, to 85% from 90%, on a refinancing; and removed federal government backing for home equity lines of credit, or so-called HELOCs, whose popularity soared in the past decade with growth double that of mortgage debt.
He said the growing appetite for HELOCs was of particular concern and was an "important" factor in the rise in overall household debt. Mr. Flaherty said some banks were insuring, through Canada Mortgage and Housing Corp., their exposure to HELOC liabilities and he wants to put an end to that practice.
"That's particularly risky," Mr. Flaherty said. "Some of those loans are not used to create housing in Canada. They are used to buy boats and cars and big-screen TVs. That's not the business mortgage insurance was designed for."
Growth in home-equity lines of credit surged 170% in the past decade, or twice the rate of mortgage debt, and now represent 12% of overall household debt.
Executives at Bank of Montreal were quick to applaud the government's move.
"The actions announced are prudent, measured, responsible and timely," said Frank Techar, president of personal and commercial banking at Bank of Montreal.
The changes will be implemented in stages, with adjustments on amortization and refinancing limits coming into force on March 18. Government backing on HELOCs will be removed as of April 18.
The government said exceptions would be allowed after the new measures come into force when needed to satisfy a home purchase or sale and financing agreement struck before the March and April in-force dates.
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."
Further, there are no plans to target condominium purchases by requiring monthly condo fees be added to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage.
The changes to the country's mortgage rules -- the second in as many years -- 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. That surpasses the level of debt held by American households, whose appetite for borrowing helped stoke the financial crisis of a few years ago.
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. Joining the chorus have been chief executives at the big banks, most notably Ed Clark at Toronto-Dominion Bank, in publicly advocating for tougher mortgage standards.
Last Friday, Prime Minister Stephen Harper acknowledged his government was considering changes to the rules governing mortgages.
In February of 2010, Mr. Flaherty moved to toughen up the mortgage rules amid worries that Canada was in the midst of a housing market bubble. The reforms, since introduced, compelled borrowers to meet standards for a five-year fixed-rate mortgage, even if the buyer wanted a shorter-term, variable rate loan; reduced the amount Canadian can borrow against their home, to 90% of the property value from 95%; and require purchasers of rental properties to issue a 20% down payment as opposed to 5%. The moves played a role, observers say, in slowing down real estate activity.
Analysts at Scotia Capital suggested government regulation was the way to go in terms of curbing household appetite for credit as opposed to the Bank of Canada raising interest rates, which they said would be "imprudent" at this time.
The central bank issues its latest rate statement on Tuesday and it is expected to hold its benchmark rate at its present 1% level as signs indicate the economy may be benefiting from renewed business and consumer confidence in the United States.
Stewart Hall, economist at HSBC Securities Canada, said the extraordinarily low-rate environment "provides all the incentive to consumers to borrow and spend and none of the incentive to save. You can try to [regulate] that away but that is apt to be fraught with significant frustration."
Courtesy of The Financial Post
