Ottawa tightens mortgage rules to make it tougher to buy a home

by Les Whittington

OTTAWA—Finance Minister Jim Flaherty singled out what he said was the overheated Toronto housing market when he moved again Thursday to take some of the steam out of mortgage lending.

The government is tightening mortgages by reducing the maximum amortization for a government-insured mortgage to 25 years from 30 years.

It is also lowering the maximum amount Canadians can borrow when refinancing a property to 80 per cent from 85 per cent of the value of their homes. Flaherty has complained in the past about people using their homes at ATM machines.

And government-backed mortgage insurance will no longer be available for homes with a purchase price of more than $1 million.

Flaherty said the moves will “help to ensure households do not become overextended.”

He told reporters he’s worried about what he is hearing from Toronto builders about the hot Toronto housing market, which he said shows no signs of cooling off. Part of this trend is being caused by speculators and house “flippers,” he noted.

The moves, the fourth time the government has taken action to take the steam out of the housing market, is a tacit admission the economy is too iffy to allow the Bank of Canada to raise interest rates, which would drive up borrowing costs and reduce the risk of runaway inflation in real estate.

Flaherty and Bank of Canada Governor Mark Carney have warned repeatedly about Canadians borrowing too heavily because they are taking advantage of historically low interest rates.

In a speech in Halifax, Carney said, “Our economy cannot depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth.”

“Today, federal authorities have taken additional prudent and timely measures to support the long-term stability of the Canadian housing market, and mitigate the risk of financial excesses,” Carney added.

Flaherty, who just returned with Carney from a G20 meeting in Mexico focused on trying to avoid an economic meltdown in Europe, said there are “grave concerns” about the world economy. Canada could be in for an economic shock if the problems in Europe get worse, he told the media.

He said less than five per cent of would-be buyers will be affected by the latest tightening of mortgage lending. Some of them won’t invest in a house now and some will be forced to buy a cheaper house, Flaherty said. Both of those results would help rein in housing inflation and reduce the likelihood of Canadians taking on debts they will not be able to afford in the long run, he said.

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