Monday, January 17, 2011
The federal government Monday tabled a series of new rules aimed to curbing what it sees as the growing problem of household debt.
Finance Minister Jim Flaherty is changing the maximum length of most mortgages to 30 years from 35 years; cutting the maximum that can be borrowed against a person’s home and eliminating government-backed default insurance of home equity lines of credit.
Prime Minister Stephen Harper said Friday his government was “concerned about growth in the level of household debt."
Bank of Canada Governor Mark Carney has also been warning of the dangers of rising debt levels.
The key tool the federal government uses to control the mortgage market is the Canada Mortgage and Housing Corp. (CMHC). Banks typically will not provide a mortgage to anyone with a down payment of less than 20% of the purchase price unless the CMHC is willing to backstop the loan.
The CMHC will now no longer insure any mortgage with a term longer than 30 years. Until the change, it was insuring 35-year mortgages.
Flaherty also instructed the CMHC it can no longer insure home equity lines of credits (HELOCs). That means individual banks will be on the hook for any HELOC defaults.
Because banks will assume all of the risks of default, banks are expected to tighten up eligibility requirements for HELOCs.
Finally, a person who wants to take out a loan against their home will be able to borrow a maximum of 85% of the value of their home, down from 90%.