Source: Business Week
Canada Tightens Mortgage Rules to Curb Household Debt
January 17, 2011, 9:45 AM EST
By Theophilos Argitis
(Adds Flaherty comments in second and third paragraph, analyst comment in ninth paragraph.)
Jan. 17 (Bloomberg) -- Canadian Finance Minister Jim Flaherty announced steps to tighten record household borrowing amid concern rising debt levels could threaten the economic recovery.
Canada will shorten the maximum amortization period for government-insured mortgages to 30 years from 35 years, and lower the maximum amount homeowners can borrow against the value of their homes to 85 percent from 90 percent. Flaherty said the changes, which will take effect March 18, are primarily preventative and will have a “modest” impact on the housing market.
“This government understands the importance of not taking on more than you can afford and the dangers of ongoing debt,” Flaherty, 61, told reporters today in Ottawa. “A stable and sustainable housing market keeps our economy strong.”
The government will also withdraw its insurance on home- equity lines of credit starting on April 18, Flaherty said in a statement.
Policy makers, including Flaherty and Bank of Canada Governor Mark Carney, have been urging households in recent months to be wary of taking on too much debt after data showed the indebtedness of Canadians surpassed U.S. levels for the first time in 12 years.
“The actions announced today by Minister Flaherty are prudent, measured, responsible and timely,” Frank Techar, president of personal and commercial banking at Bank of Montreal, said today in a statement.
Rate Increases
Household debt was a record 148 percent of disposable income in the third quarter last year according to Statistics Canada data, exceeding the U.S. level of 147 percent.
Regulatory steps to stem borrowing may allow Carney to slow the pace of interest-rate increases this year. Carney has kept his key interest rate at 1 percent since September, and said in a Dec. 13 speech that further moves would be “carefully considered” as he gauges the strength of the global recovery. The Bank of Canada’s next rate announcement is tomorrow at 9 a.m. New York time.
“There had been some talk of the Bank of Canada raising rates earlier in order to slow the growth rate of household debt, but we think that today’s announcement will help to quash that idea,” David Tulk, senior rates and foreign exchange strategist at TD Securities in Toronto, said in a note to investors.
Extra Volatility
The changes may prompt some households to bring forward purchase of homes before the measures come into effect, adding an “an extra amount” of volatility to a slowing housing market, according to Tulk, while the move to withdraw backing for home equity credit lines could contribute to slowing growth in consumer credit.
Canada has relied on regulatory steps to rein in mortgage borrowing, primarily through changes for government-backed mortgages. In February, Flaherty tightened rules that forced buyers to meet standards for five-year, fixed-rate mortgages even if they opt for variable rates.
It’s the second time Flaherty has shortened amortization rules, reducing the limit in 2008 to 35 years, from 40 years. Canadians are required to insure their mortgages if they make a down payment of less than 20 percent of the value of the home.
--With assistance from Sean B. Pasternak in Toronto. Editors: Paul Badertscher, David Scanlan
