Tighter mortgage rules for Canada

Earlier this week, Finance Minister Jim Flaherty announced that the Canadian government will tighten the mortgage rules and make the criteria a little harder for Canadians to meet. The purpose for this is to avoid a housing bubble that crippled the US at the start of this recession. Flaherty actually mentioned those who purchase multiple condo units for the purpose of investment, as opposed to a home they plan to live in as being one of the main groups who need to be reigned in as their practices result in unnecessary price increases in the Canadian housing market.

The new rules will require home buyers to meet a 5 year fixed-term rate test, which is up from a 3 year fixed-term rate or the equivalent of a 1% rate increase. This will show that the potential home buyer will be able to withstand higher interest rates which are sure to occur in the future. Also, when refinancing, home owners will only be able to withdraw up to 90% of their home value, which is down from the current 95%. This will make the borrowing against a home a little more conservative. The last rule change will require a down payment of at least 20% to qualify for home owners insurance for people who buy homes that will be used for investment purposes and will not actually be lived in by the home owner.

The announcement was a minor surprise to experts as most thought that it would include a higher minimum down payment for all home buyers to 10% from the current 5% or maybe something in between like 7.5% at first and then gradually increase it to 10%. Experts also thought the maximum amortization period would be reduced from 35 years to 30 years. However, Finance Minister Flaherty decided not to change either of those two policies at this time but kept his options open for the future in case that becomes necessary.

When he made the announcement, he emphasized that the Canadian housing market is not currently in a bubble nor does the evidence show that we are headed in to one. He noted that these rule changes are proactive in nature to ensure that the market remains strong and stable moving forward.

I found this to be interesting for two reasons. The first is that it clearly shows that Canada is trying to learn from the mistakes that the US incurred which cost everyone, but especially US home owners and banks very dearly. Moreover, it shows the willingness of the Canadian government to act on behalf of the people and the Canadian people’s willingness to have the government intervene with even tougher rules. These two things are almost non-existent in the US right now, at least not on an across-the-board basis. The result is that not much gets done in the US right now and that hurts the people most of all, but also the politicians as many of them are not doing well in their re-election bids that will come up later this year. This is one area where American people and government officials can and should learn from their Canadian counterparts.