Canada tightens mortgage rules to stop housing bubble

Canadian Finance Minister Jim Flaherty said the government is introducing tougher measures on mortgages to prevent a housing bubble from forming.

The government plans to require all borrowers meet standards for a five-year fixed-rate mortgage, even if they opt for a loan with a lower rate and shorter term, Finance Canada said in a statement. This will help prepare for higher rates ahead.

The maximum amounts that can be withdrawn in refinancing a mortgage has been cut to 90% from 95% and a minimum downpayment of 20% will be required for government-backed mortgage insurance on properties bought for speculation.

The measures will take effect on April 19, it said.

"Canada's housing market is healthy, stable and supported by our country's solid economic fundamentals," Flaherty said. "However, a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing."

Canada’s real estate market has rebounded from the slump at the beginning of 2009 to return to record levels, helping drag the economy out of recession. The historic low interest rates that have helped fuel the boom are expected to start rising this year, pushing up mortgage payments.

The government said today that’s there’s no clear evidence of a housing bubble yet, but it wants to take steps to prevent one.

“Our Government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it," Flaherty said. "If some lenders aren't willing to act themselves, we will act.

The Bank of Montreal welcomed the government’s move.

"While we do not believe that Canada faces a housing bubble, we fully support the Minister's actions,” Frank Techar, president, personal and commercial banking said in a statement. “Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent. “