Canada toughens borrowing rules to cool housing market

By Louise Egan and Randall Palmer

OTTAWA (Reuters) - In its fourth crackdown in four years on a still-hot housing market, Canada tightened conditions for both borrowers and lenders on Thursday to put the brakes on home buying and deflate a possible housing bubble before it pops.

Mindful of the U.S. housing crisis, where consumers ratcheted up debt only to be sideswiped by rising interest rates, financial crisis and recession, Canadian policymakers said their new rules and guidelines would make it harder for home buyers and homeowners to take on massive debt.

"I have been listening to the market, and quite frankly I don't like what I hear ... Some calming of the market is desirable," Finance Minister Jim Flaherty told a news conference in Ottawa.

"In Toronto, in particular, what I've observed and heard about from developers is continuous building without restriction because of persistent demand. This concerns me because it's distorting the market."

Canada's bank regulator, the Office of the Superintendent of Financial Institutions, released its own guidelines to lenders, urging them to perform due diligence on the borrower's ability to repay debt and manage risks effectively.

Canadian policymakers want tighter mortgage rules to do the work that interest rates cannot, given the inability or unwillingness of central banks to raise borrowing costs in the face of global economic problems.

The mortgage rule changes will cut the maximum length for government-backed insured mortgages to 25 years from 30 years and lower the maximum amount Canadians can borrow against their homes to 80 percent from 85 percent, among other measures.

The amortization period for mortgages had ballooned to 40 years amid deregulation in the last decade. But the government trimmed it to 35 years in 2008, 30 years in 2011 and now 25 years to discourage home buyers from taking on too much debt.