Glut of Bank Owned Homes – Canada Acts Again to Ensure It Doesn’t Happen

The oversupply of bank owned homes is one situation that Canada has been trying to prevent. For the second time since February last year when the Canadian Finance Department implemented new mortgage rules, the department announced additional rules to tighten mortgage lending.

To prevent the foreclosure crisis that downed housing markets in the U.S., Great Britain and Ireland, the Canadian government decided it had to again act to make sure that only those who can sustain monthly mortgage payments are the ones obtaining home loans. It also had to make sure that it’s not easy for people to use their home equities to buy luxurious items such as wide-screen flat TVs, boats and newer cars.

In February last year, the Finance Department implemented the following for home loans backed by the government:

• Mortgage borrowers need to pass the requirements for a five-year fixed home loan, even if their chosen mortgage term is longer and their mortgage rate is relatively low.
• The minimum down payment should be 20 percent of the purchase price for homes purchased for investment purposes.
• The maximum loan-to-value rate for refinance loans has been reduced from 95 percent to 90 percent.

This year, the changes made last year to prevent a glut of bank owned homes were enhanced with the following new measures:

• Reduction of the term of government-backed home loans from 35 years to 30 years
• Further reduction of the loan to value rate for home loans from 90 percent to 85 percent
• Discontinuation of government backing on home equity lines of credit

The first two changes will be enforced starting March 18 while the third – the withdrawal of backing for HELOCs and similar lines of credit – will be in force on April 18.

The new measures are intended to achieve the following:

• Reduction of total interest payments on home loans
• Faster buildup in home equity
• Completion of mortgage payments before retirement
• Promotion of saving

Elimination of the use of home-secured credit to purchase consumer items

Canada has been paying special attention to residential mortgage trends. The Bank of Canada, for instance, uses extreme scenarios to test the strength of the housing sector. In its test in December last year, it reported that if unemployment hits the extreme level of 11 percent, mortgage defaults would reach 1.4 percent, which is still manageable for the country.

According to Canada’s Finance Department, its strong housing regulations have been instrumental in the country’s avoidance of the avalanche of bank owned homes that devastated the economies of other countries during the global recession.

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