OTTAWA -- Ottawa is tightening the rules for government-guaranteed mortgages that will limit the maximum amortization period to 35 years and require a minimum down payment in a bid to prevent a meltdown like occurred in the U.S. subprime mortgage market. The Finance Department said it will no longer guarantee 40 year mortgages and will require a minimum down payment of five per cent of the value of a home.
Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent.
The changes announced Wednesday will cut this to 95 per cent. Borrowers may still borrow the five per cent down payment, but it will not be insured under the new scheme.
The new limits, which are set to take effect Oct. 15, will affect only new government-backed insured mortgages.
Canadians who already hold mortgages won't be affected by the changes.
In April, Bank of Canada governor Mark Carney raised his concerns about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.
Carney told a Commons committee that the central bank was watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.
In the United States, imprudent lending by banks and financial companies to high-risk borrowers at low rates created a housing bubble that eventually exploded when mortgages renewed at higher rates and borrowers couldn't pay.
The collapse in the U.S. housing market led to broader troubles in the U.S. economy, reducing demand for Canadian exports such as lumber and autos. It also led to a corporate and consumer credit crunch that is still being felt by ordinary Americans and companies.
In Canada, the government said Canadian banks and other lenders have not written many government-backed mortgages to borrowers with low credit scores, but to ensure this continues the changes will establish a credit score floor of 620.
The changes also set a maximum of 45 per cent for the proportion of gross income that is spent on debt servicing and housing-related fixed or essential payments.
Ottawa also noted that reducing amortization from 40 years to 35 years on a $200,000 mortgage with a six per cent interest rate would increase the borrower's monthly payment by $41. The borrower would also save $49,000 in interest payments.
Canada Mortgage and Housing Corp., a Crown corporation, is the country's largest insurer of home mortgages. The government also backs private mortgage insurers through guarantee agreements that protect lenders in the event of default by the insurer.
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