By Pete Evans, CBC News
Finance Minister Jim Flaherty outlined new rules aimed at reining in a hot housing market today and ensuring
Canadians aren't taking on more debt than they can afford.
Flaherty outlined a series of changes to the rules that govern the Canada Mortgage and Housing Corporation, the
crown corporation that effectively oversees the housing market by insuring the vast majority of Canadian
The most important new change is that the maximum amortization period to 25 years, down from 30. The longer a
mortgage is spread out, the lower the monthly mortgage payments are — but the more the borrower ends up
paying overall over time.
The impact of the change is likely to be significant. It's about the same as a 0.9 percentage point increase on a
typical mortgage, Bank of Montreal economist Robert Kavcic noted.
Indeed, the numbers add up. A $300,000 mortgage spread over 30 years at 4 per cent would cost $1,426 a month
to pay back. That same mortgage amortized over only 25 years increases the monthly payment by $152 or 10 per
cent to $1,578 a month.
Ultimately though, the higher monthly payment saves the borrower money in the long run. The total interest
payments are $213,558.91 on the 30-year mortgage, but only $173,416.20 on the 25-year one.
The shortened amortization is also likely to affect a huge segment of the market, as about 40 per cent of all new
mortgages were amortized over 30 years last year, the Canadian Association of Accredited Mortgage
Anyone who needed or wanted a 30-year mortgage before is going to have to qualify under tougher 25-year
Ottawa has now moved three times to rein in the maximum mortgage term, since the CMHC briefly started
insuring mortgages with 40-year terms in 2006. The limit was brought down to 35 years, then 30 and now the
more traditional 25.
"The reductions to the maximum amortization period since 2008 would save a typical Canadian family with a
$350,000 mortgage about $150,000 in borrowing costs over the life of that mortgage," Flaherty said.
"Our government has encouraged Canadians to borrow responsibly," Flaherty said. "Most Canadians have done
At 25 years, the maximum amortization period for CMHC-backed loans is now back to where it had historically
been before the Harper government began raising the period after taking office in 2006.
Refinancing limit set at 80%
Flaherty also outlined a few other measures Thursday.
The government has lowered the total amount that Canadians can withdraw when refinancing their homes to 80
per cent of the home's value, from 85 per cent.
"This will promote saving through home ownership and encourage homeowners to prudently manage borrowings
against their homes," Flaherty said.
Flaherty also moved to cap the maximum gross debt service ratio at 39 per cent and the maximum total debt
service ratio at 44 per cent in order to get CMHC insurance. Banks calculate the former by adding up mortgage
payments and property taxes on a home loan, and dividing by the borrower's income. The latter adds in other debt
payments such as lines of credit and credit cards to the top side of the ledger.
Although they both have obscure, technical names, they're both effectively just limits on how much debt a borrower
is allowed to take on as a percentage of their overall income. That move, too, is aimed at making sure a borrower
can't bite off more than he or she can chew.
The final change was to limit CMHC insurance to homes priced under $1 million. "Wealthy people can borrow
whatever they want from banks, and they can work that out from banks," Flaherty said. "That is not my concern."
That effectively means that if a homebuyer wants to buy a home for more than $1 million, they can't get insurance
on it — which in turn means they'll have to come up with the 20 per cent down payment requirement in order to get
an uninsured mortgage.
So under any circumstance, any new borrower wanting to buy a home of $1 million or more is going to have to
have $200,000 down at a minimum. That's also likely to have a major impact on a comparatively small segment of
All of the changes will be in effect as of July 9, 2012. In the interim, the action in hot Canadian housing markets is
likely to get even hotter, experts say, as borrowers scramble to get in ahead of the more stringent rules.
"As we’ve observed around prior mortgage rule changes, some housing market activity will likely be pulled forward
ahead of the implementation date," Kavcic noted.
But there's likely to be a subsequent pullback, too, he says. The last time Ottawa tinkered with CMHC rules, home
sales fell by three per cent in the two months following the implementation date.