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OTTAWA — The federal government is moving once again to tighten mortgage-lending rules amid lingering concerns about an overheated housing market and household debt levels.
|Zoltan M. Padar|
The changes will also see the government lower the maximum Canadians can borrow against their home to 80 per cent of its value, from 85 per cent, in an effort to encourage them to keep more equity in their homes.
As well, under the new rules, to qualify for a mortgage loan Canadians can spend a maximum of 39 per cent of their household income on home expenses such as mortgage, property taxes and heating.
Flaherty said Ottawa will limit government-backed insured mortgages to home purchases of less than $1 million. A downpayment of at least 20 per cent will be required on mortgage loans for homes priced at or above $1 million.
Reducing the amortization period will increase monthly payments, but reduce the amount of total interest paid on a mortgage. Ottawa expects the change from a 30-year to 25-year amortization will, on a $350,000 mortgage loan at four per cent, increase the monthly payment $177 but reduce total interest costs by nearly $47,000.
The government believes less than five per cent of home buyers will be affected by the clampdown.
The new rules take effect July 9, 2012.
"We watch carefully, we monitor the market carefully. I remain concerned about parts of the Canadian residential real estate market, particularly in Toronto, but not only in Toronto, so that is why we are intervening once again," Flaherty told reporters in Ottawa.
"It's our job to try to be ahead of things and act in a measured way, listening to the market. And I have been listening to the market, and quite frankly, I don't like what I hear, particularly in the condo market."
Flaherty said the government's moves are part of an effort to "moderate behaviour" among Canadian homeowners and make them reflect before jumping into the housing market at the high end.
Canada's largest city is seeing continuous home building because of persistent demand, he noted, which is accelerating prices and eroding affordability.
"This concerns me because it's distorting the market, quite frankly," the minister added. "My judgment is that we need to calm particularly the condo market in a few Canadian cities."
Flaherty and some of the country's leading economists have for months been warning they remain worried about Canada's housing market and rising household debt.
In March, prior to delivering the federal budget, Flaherty met with 13 private-sector economists for his traditional pre-budget consultation to get their assessment of the Canadian economy.
Some of the big banks suggested at the time that the federal government consider implementing "measured actions," such as reducing the maximum amortization period for government-insured mortgages back to the traditional 25 years.
On Thursday, the banks largely welcomed the measures.
"Overall we see (Thursday's) announcement as a much better substitute to interest rate hikes since the moves are aimed with almost surgical precision at the margins of the mortgage market," Benjamin Tal with CIBC World Markets said in a research note.
"The combined impact of the four changes will not be large enough to derail the housing market, but are clearly significant enough to soften activity, and at the margin will act as a negative for house prices —mainly at the mid-range segment of the market."
Frank Techar, president of personal and commercial banking at BMO Financial Group, called the changes "prudent, measured, responsible, timely."
"Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada's housing market experiences a soft landing," Techar said in a statement.