NEWS: FLAHERTY UNVEILS NEW MORTGAGE RULES TO CURB DEBT

 

 

Finance Minister Jim Flaherty concludes a news conference on household debt, in Ottawa on Monday, Jan. 17, 2011. (Fred Chartrand / THE CANADIAN PRESS)

 

January 17, 2011

 

CTV.ca News Staff

Finance Minister Jim Flaherty announced new rules for Canadian mortgages on Monday that he said will "protect the stability of the economy."

Flaherty's announcement comes on the heels of a recent warning from the Bank of Canada that Canadians' domestic debt burden is the highest on record.

The Monday announcement included three new rules for the mortgage industry that will come into effect March 18:

 

  • Mortgage amortization periods will be reduced from 35 years to 30 years.
  • The maximum amount Canadians can borrow to refinance their mortgages will be lowered from 90 per cent to 85 per cent of the value of their homes.
  • The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

 

"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 practices," Flaherty said Monday.

It is the third time in three years that Flaherty has tightened credit rules while interest rates remain historically low.

The new restrictions are intended to ensure that Canadians don't slip into unmanageable debt, which could throw the economic recovery off the rails, he said.

"Today's measures are about our government continuing to protect the stability of the economy by ensuring lenders' practices are sustainable, which will in turn ensure Canadian families have increasingly secure and sustainable home ownership."

Flaherty targeted home-equity loans and lines of credit because some Canadians were using the money on consumer goods rather than to build equity into their homes, he said.

"They are used to buy boats and cars and big-screen TVs, and that's not the business mortgage insurance was designed for," he said. "Our measures will help improve the financial situation of households in Canada."

The Bank of Canada announced earlier this month that Canadians' domestic debt burdens had hit the highest levels on record. The bank said the ratio of household debt to disposable income has reached 148 per cent -- which is higher than in the United States.

The International Monetary Fund also recently warned that household debt is the number one risk to the Canadian economy. Canadian household debt is now at $1.4 trillion, while mortgage delay payments have increased by 50 per cent.

However, Flaherty maintained that Canada is not facing a debt crisis.

"We are responding to a situation that could develop," he told reporters.

"It's obvious we could have gone farther. We have not touched down-payment requirements, for example. This is intentional. We are trying to strike the right balance so that we do not create any sort of shock in the market, or any sort of dramatic pressure in the market."

The measures are equivalent to boosting interest rates by half a percent but are more specific, according to Douglas Porter, deputy chief economist at The Bank of Montreal.

"This is way a way of not affecting a lot of innocent bystanders, including the manufacturing and the tourism sector, by putting more upward pressure on the Canadian dollar," Porter told The Canadian Press.

Meanwhile Avery Shenfeld, chief economist at CIBC, said the new rules will have only a "marginal" effect on mortgage lending.

"It's the difference between somebody borrowing $200,000 and $180,000 or 190,000," he said. "More dramatic would have been to raise the down payment, which would have a larger impact on people's ability to finance their first home."

BNN's Michael Kane said Flaherty is clearly concerned that Canada's low lending rates have inspired people to borrow more than they would normally.

"What he is saying, and he reiterated this two or three times, is we see Canadians borrowing to the max at record low interest rates, and what he is afraid of is that when interest rates to start to rise...then you can get into a dangerous situation where you can't pay down your mortgage," Kane told CTV's Canada AM.

With files from The Canadian Press

 

 

Source: www.ctv.ca

 

 

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