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Canada tightens mortgage lending rules

Published:Wednesday | February 17, 2010 | 12:00 AM


Canada is tightening mortgage lending rules as historic low rates are raising fears of a potential housing bubble, the country's finance minister said Tuesday.

Finance Minister Jim Flaherty said there is no compelling evidence of a bubble but said the government is taking proactive measures to prevent one.

"We're looking ahead and taking action now before there is a problem," Flaherty said.

To qualify for a government-insured mortgage, borrowers will have to meet the standards for a five-year fixed-rate mortgage, up from the current standard for three years.

Flaherty also said if Canadians want to purchase a property where they will not be living, they will have to come up with a 20 per cent down payment.

And he's imposing tighter restrictions on how much money people can borrow against their houses. Instead of being able to borrow 95 per cent of the value of their property, the limit will now be 90 per cent. The changes take effect April 19.

"We do want to discourage the tendency by some to use their home as an ATM machine, the tendency by some to buy three or four condominiums by way of speculation," Flaherty said. "This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up."

Canada's housing recovery has been so rapid that some are worried. There has been no crippling mortgage meltdown or banking crisis in Canada, where there is greater oversight of mortgages, but Canada's central bank has vowed to keep interest rates at a historic low of 0.25 per cent until the middle of the year.

A variable-rate mortgage interest rate can be had for as low as two per cent to 2.25 per cent in Canada, while the fixed five-year posted rate at Canada's top five banks is 5.39 per cent.

Some are worried that borrowers who are taking out variable-rate mortgage rates will struggle to make payments when interest rates rise. Canada's central bank has been warning for months that homeowners should make sure they can absorb an increase in their floating-rate mortgages once rates begin to rise.