Canada Tightens Mortgage Lending Rules to Curb Household Debt

Canadian Finance Minister Jim Flaherty announced steps to tighten record household borrowing amid concern rising debt levels could threaten the economic recovery.

Canada will shorten the maximum amortization period for government-insured mortgages to 30 years from 35 years, and lower the maximum amount homeowners can borrow against the value of their homes to 85 percent from 90 percent, Flaherty said in a statement. The changes take effect March 18.

“A stable and sustainable housing market keeps our economy strong,” Flaherty, 61, said today in Ottawa.

The government will also withdraw its insurance on home- equity lines of credit starting on April 18.

Policy makers including Flaherty and Bank of Canada Governor Mark Carney have been urging households in recent months to be wary of taking on too much debt after data showed the indebtedness of Canadians surpassed U.S. levels for the first time in 12 years.

“The actions announced today by Minister Flaherty are prudent, measured, responsible and timely,” Frank Techar, president of personal and commercial banking at Bank of Montreal, said today in a statement.

Household debt was a record 148 percent of disposable income in the third quarter last year according to Statistics Canada data, exceeding the U.S. level of 147 percent.

Rate Increases

Regulatory steps to stem borrowing will allow Carney to slow the pace of interest-rate increases this year, Charles St- Arnaud, an economist and foreign-exchange strategist at Nomura Securities International, said in a Jan. 13 report.

Canada has relied on regulatory steps to rein in mortgage borrowing, primarily through changes for government-backed mortgages. In February, Flaherty tightened rules that forced buyers to meet standards for five-year, fixed-rate mortgages even if they opt for variable rates.

It’s the second time Flaherty has shortened amortization rules, reducing the limit in 2008 to 35 years, from 40 years. Canadians are required to insure their mortgages if they make a down payment of less than 20 percent of the value of the home.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net.