The federal government has finally granted social housing operators new flexibility to borrow money on the open market — a decision that should encourage renovations and upgrading of affordable housing stock.

Housing co-ops have been lobbying Ottawa for more than a year to allow them to opt out of government-backed mortgages so that they can take out new mortgages with credit unions.

They wanted to be able to seek long-term financing on commercial terms so that they could pay for renovations and upkeep. That's because the government-backed mortgages that have supported co-op housing and social housing in the past are no longer available.

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Human Resources Minister Diane Finley, who has responsibility for the Canadian Mortgage and Housing Corporation, will allow social-housing operatives greater flexibility in seeking to re-finance and renovate their buildings.

Usually, commercial terms are more expensive than government-backed mortgages, but some co-ops are locked into higher-rate mortgages that date back to the 1980s.

Ottawa wanted to charge them huge penalties to back out of those arrangements and set up new deals with the private sector — even though Ottawa is gradually pulling out of the social-housing mortgage business.

Now, Human Resources Minister Diane Finley has conceded and will only charge penalties in line with those levied by commercial banks.

Advocates for non-profit housing and housing co-ops said they are pleased with the newfound flexibility.

"We're a pretty satisfied group as far as the federal government is concerned," said Nick Sidor, director of corporate affairs for the Co-operative Housing Federation of Canada.

The decision "will benefit lower-income households living in existing social housing, including individuals, families, seniors, persons with disabilities, and aboriginal people, by helping to renew Canada's affordable housing stock," Finley said in a statement.

It's a change of attitude for the federal government, which resisted pleas from co-ops for months.

When a Winnipeg housing co-op asked Canada Mortgage and Housing Corp. earlier this year if it could pay off its $4.5-million mortgage, CMHC said it would have to pay a $5.5-million penalty to take into account interest the co-op would have paid on a loan fixed at 13.25 per cent. The proposed penalty effectively prevented the co-op from borrowing from a credit union to repair its 36-year-old facilities.

"It was ridiculous that affordable housing mortgages had become a government cash cow, so I am very glad to see we were able to change the Conservatives' minds," Liberal housing critic John McCallum said in a statement.

CMHC, which is under Finley's responsibility, did not immediately respond to questions about why it changed its stance or how much the change would cost the federal government.

The financing problem is a symptom of a much larger issue facing affordable housing in Canada, social housing advocates say.

That's because the federal government is gradually reducing its role in that area. For now, it provides $1.7 billion through operating agreements that allow for low rents. But those agreements are not being renewed, and arrangements with the provinces to pick up the slack are not ready.

"This is a good piece, for sure, but no doubt there are far larger issues at stake," said Dallas Alderson, director of policy and programs at the Canadian Housing and Renewal Association.

The federal funding supports about 605,000 households across Canada. While this week's decision won't affect all of those households, it does open the door to new financing alternatives for many co-ops and non-profit housing units, Sidor said.

Still, Ottawa is not letting everyone off the hook for big penalties.

The lower charges will only be available to housing projects that will remain financially viable, need to be repaired or upgraded, and have a reasonable 10-year plan for development, CMHC said.