Ottawa toughens mortgage rules again, eyes debt

Mon Jan 17, 2011 4:34pm EST
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By Ka Yan Ng and David Ljunggren

TORONTO/OTTAWA (Reuters) - Canada moved on Monday to tighten its mortgage rules for the second time in less than a year, citing the need to prevent the kind of housing market problems that led other countries into financial crisis.

The new rules, designed to ensure Canadians don't take on more debt than they can handle, took aim at mortgage amortization, refinancing and the use of lines of credit secured by homes.

Many U.S. homeowners borrowed against the rising value of their houses and refinanced mortgages to fund spending in the run-up to the global recession.

Finance Minister Jim Flaherty, who warned that Canadian interest rates were bound to go up, said the new measures would "have some moderating effect on the (housing) market."

"The main reason we're taking the action is for the longer term, that we avoid even the beginning of the development of the kinds of issues that have happened in some other countries, that have been very damaging to families," Flaherty said.

Canada's housing market avoided the meltdowns seen in countries like the United States, Britain and Ireland during the global recession. Resale prices dropped in 2008, then rebounded sharply the following year thanks to low mortgage rates that made it easier for customers to borrow money.

This sparked a rise in borrowing that has alarmed some policymakers. Recent data from Statistics Canada shows Canadian household debt has risen to a record C$6.1 trillion, or 148 percent of disposable income.

Flaherty said the insurance had become "particularly risky" because some Canadians were using the lines of credit to buy things like boats, cars and big screen televisions.   Continued...

<p>The Toronto Skyline with a condominium building under construction (L) is shown in downtown Toronto, May 14, 2009. C REUTERS/ Mike Cassese</p>