The End of the Canadian Real Estate Market?

The federal Finance Department is moving to further tighter mortgage rules to address concerns over high Canadian household debt.

The government announced Wednesday it will reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years, and also drop the upper limit that Canadians can borrow against their home equity from 85 per cent to 80 per cent.

Buyers who purchase a home with a down payment of less than 20 per cent of its value are required to purchase government-backed mortgage insurance through Canada Mortgage and Housing Corporation.

Under the new rules, mortgages amortized over a period longer than 25 years will no longer qualify for that insurance, making it effectively impossible to get a highly leveraged mortgage of more than 25 years in Canada.

A shorter amortization period demands higher payments, but it will also mean homeowners build up equity in their homes faster.

The announcement marks the fourth time in four years that the government has clamped down on mortgage rules. It first moved in 2008 by cutting the maximum amortization period to 35 years from 40 and requiring a minimum down payment of five per cent.

Further changes were announced in February 2010, and came into effect April of that year.

In January 2011, the federal government reduced the maximum amortization period for new government-backed insured high-ratio mortgages to 30 years from 35 years and cut the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent.

It was not immediately clear when the changes will be phased in, but the last two announcements of changes were in effect about 60 days after they were announced.

Canadian mortgage rates have been near record lows for months.

Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have been warning for months that Canadians have been racking up more debt than they can sustain during the long period of ultra-low interest rates.

CMHC first introduced insurance for 40-year-amortizations in 2006, when it also moved to provide mortgage insurance on 100 per cent financing.