Ottawa tightens mortgage insurance rules
The federal government said Wednesday that it is tightening the rules relating to government-guaranteed mortgages, even though there is no evidence that the Canadian market is facing the kind of turmoil that has disrupted the United States.
The new rules, set to take effect Oct. 15, are a "responsible and measured approach … to reduce the risk of a U.S.-style housing bubble developing in Canada," the Department of Finance said in a news release.
However, it also said that Canadian creditors' "prudent and cautious approach" to mortgage lending, as well as sound supervision, have "allowed Canada to maintain strong and secure housing and mortgage markets."
The government said the measures will apply to new, government-backed, insured mortgages. "Canadians who already hold mortgages will not be affected," it said.
The changes include:
- Cutting the maximum amortization period to 35 years from 40.
- Requiring a minimum down payment of five per cent, whereas loans for 100 per cent of the price are possible now.
- Establishing a requirement for a consistent minimum credit score.
- Introducing new loan-documentation standards.
The government acknowledged that the proportion of bank mortgages in arrears is stable at 0.27 per cent, "near the lowest levels experienced since 1990 and well below the highs of 0.65 per cent experienced in each of 1992 and 1997."
And housing prices don't show evidence of speculation, the Finance Department said, because they are "in line with economic factors such as low interest rates, rising incomes and a growing population."
'0 down mortgages only make sense in a rising market. When the market is 'correcting' or even just flat the 0 down mortgage can quickly become a nightmare for anyone.'
Mortgage insurance protects lenders when a borrower defaults by making up any shortfall needed to repay the loan if the sale of the property doesn't cover the debt.
Federally regulated lenders must have mortgage insurance on loans where the buyer's down payment is less than 20 per cent of the price.
The Canada Mortgage and Housing Corp. (CMHC), a Crown corporation, as well as private insurers provide mortgage insurance.
The government backs CMHC and also private mortgage insurers so the private insurers can compete with CMHC.
Just over a year ago, Parliament passed a bill changing mortgage insurance to make home buying easier, and in 2006, CMHC eased the insurance rules.