Jan 17 (Reuters) - Canada moved to tighten mortgage rules on Monday 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, and to curb rising household debt levels.
Under the new rules, set to take effect this spring, Ottawa will:
* Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 percent. That cuts down total interest payments over the amortization period and helps homeowners build equity more quickly.
* Lower the maximum amount people can borrow in refinancing their mortgages to 85 percent from 90 percent of the value of their homes, which will help Canadians save through ownership. Finance Minister Jim Flaherty provided this example: If a home is valued at C$300,000, refinancing at 90 percent would allow the homeowner to access up to C$270,000. Refinancing at 85 percent would provide the homeowner access up to C$255,000. “The lower refinancing limit means homeowners will keep an additional C$15,000 in equity in their homes,” he said.
* Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit. Flaherty said the insurance had become “particularly risky” because some people were using the lines of credit to buy things like boats, cars and big screen televisions. This will shift more risks back to lenders.
* In 2010, Ottawa adjusted the mortgage insurance guarantee framework to include:
- Requiring that borrowers meet the standards for a five-year fixed rate mortgage even if they chose a mortgage with a lower interest rate and shorter term.
- Lowering the maximum amount Canadians can withdraw in refinancing their mortgages to 90 percent from 95 percent of the value of their homes.
- Requiring a minimum downpayment of 20 per cent on non-owner-occupied properties bought for investment.
* In 2008, Ottawa changed its minimum standards for the mortgage insurance guarantee framework, including:
- Fixing the maximum amortization period for new government-backed insured mortgages to 35 years, down from 40-year products
- Requiring a minimum downpayment of 5 percent for new government-backed insured mortgages.
- Requiring the lender to make a reasonable effort to verify that the borrower can afford the loan payment. (Reporting by Ka Yan Ng; editing by Rob Wilson)