Ottawa revamps mortgage rules

KEVIN CARMICHAEL

Globe and Mail Update

July 9, 2008 at 6:07 PM EDT

OTTAWA

The federal government, fearful of a U.S.-style housing bubble, has pledged steps aimed at keeping riskier borrowers in their rental units and away from homes they probably can't afford.

Canada's housing agency will no longer be allowed to guarantee loans with amortization periods longer than 35 years, a move that likely will end the surge in 40-year mortgages, popular because they allowed borrowers to reduce their monthly payments.

Prime Ministers Stephen Harper's Conservative government said Wednesday Canada Mortgage and Housing Corp. will also require a minimum down payment of 5 per cent to get government insurance.

Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney both expressed concern about the surge in 40-year mortgages over the past year, suggesting the loans were feeding a bubble.

The U.S. housing market collapsed last fall amid record defaults by homeowners who got loans during a period of easy credit at the start of the decade. U.S. officials say their housing problems continue to persist, and many economists say the market's woes have driven the world's largest economy into recession.

"Today's announcement marks a responsible and measured approach by the government to ensure Canada's housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada," the Finance Department said in a news release.

The government also said borrowers will require a minimum credit score of 620 to qualify for a CMHC insured mortgage, and that it will demand stronger documentary evidence that borrowers can pay their loans.

The changes take effect Oct. 15 with few exceptions, Finance said in the release.

Economists at Scotia Capital in Toronto said the measures would have a limited impact on Canada's economy, which has gotten a boost from record home buying.

"The changes are more about optics, in comparison to a fairly modest impact upon the economy, housing markets or financial markets," Derek Holt and Karen Cordes wrote in a note to clients.

Currently, home buyers can get a CMHC-backed mortgage

 – even one with an amortization period of four decades –

with no money down. Such "financial innovation" only came to the market toward the end of 2006, and the "marketplace has been quick to adopt these innovations," Finance said in a background document explaining the changes.