Government of Canada Takes Action to Strengthen Housing Financing
The Honourable Jim Flaherty, Minister of Finance, today announced a number of
measured steps to support the long-term stability of Canada's housing market and
continue to encourage home ownership for Canadians.
"Canada's housing market is healthy, stable and supported by our country's solid
economic fundamentals," said Minister Flaherty. "However, a key lesson of the global
financial crisis is that early policy action can help prevent negative trends from
developing."
The Government will therefore adjust the rules for government-backed insured mortgages
as follows:
"There's no clear evidence of a housing bubble, but we're taking proactive,
prudent and cautious steps today to help prevent one. Our Government is acting to
help prevent Canadian households from getting overextended, and acting to help
prevent some lenders from facilitating it," said Minister Flaherty. "If some lenders
aren't willing to act themselves, we will act. These measures demonstrate the
Government is committed to taking action when necessary to support the longterm
stability of a sector that is so vital to our economy and the financial wellbeing
of Canadian families."
These adjustments to the mortgage insurance guarantee framework are intended to
come into force on April 19, 2010.
Backgrounder
International Monetary Fund, our housing market is fully supported by sound
economic factors, such as low interest rates, rising incomes and a growing
population. Moreover, mortgage arrears—overdue mortgage payments—have also
remained low.
Today's announcement is part of the Government's policy of proactively adjusting
to developments in the housing market that could take root and cause instability.
These steps are timely, targeted and measured, and will reinforce the importance
of Canadians borrowing responsibly and using home ownership as a savings
mechanism.
credit risk management tool that protects lenders from losses on mortgage loans.
If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the
property are insufficient to cover the resulting loss, the lender submits a claim to
the mortgage insurer to recover its losses.
The law requires federally regulated lenders to obtain mortgage insurance on
loans in which the homebuyer has made a down payment of less than 20 per cent
of the purchase price (also called high loan-to-value ratio loans). The homebuyer
pays the premium for this insurance, which protects the lender if the homebuyer
defaults.
The Government ultimately backs most insured mortgages in Canada. It is
responsible for the obligations of Canada Mortgage and Housing Corporation
(CMHC) as it is an agent Crown corporation. In order for private mortgage
insurers to compete with CMHC, the Government backs private mortgage
insurers' obligations to lenders, subject to a deductible equal to 10 per cent of the
original principal amount of the loan.
In October 2008, the Government adjusted its minimum standards for
government-backed, high-ratio mortgages, including:
government-backed mortgages.
affordability of housing for Canadians. It is important that Canadians borrow
prudently and are able to manage their debt loads when interest rates rise.
Lender and mortgage insurers look at two key ratios when assessing the ability of
a borrower to make payments on a mortgage loan:
borrowers qualify for their mortgage amount using the greater of the contract rate or the
interest rate for a five-year fixed rate mortgage when calculating the GDS and TDS
ratios.
This measure is intended to protect Canadians by providing them with additional
flexibility to support mortgage payments at higher interest rates in the future.
Borrowers seeking financial flexibility can currently refinance their mortgage and
increase the amount they are borrowing on the security of their home up to a limit of 95
per cent of the value of the property. This type of refinancing lowers the borrower's
equity in their home. The adjustments today will lower the maximum amount of the
mortgage loan in a refinancing of a government-backed high ratio mortgage loan to 90
per cent of the value of the property, consistent with the principle that home ownership is
a tool for savings.
mortgage insurance on non-owner-occupied properties purchased for speculation.
Currently, borrowers may purchase a residential property with a 5 per cent down
payment. Today's change will require a 20 per cent down payment for small (i.e., 1- to 4-
unit) non-owner-occupied residential rental properties. Borrowers purchasing owneroccupied
residential properties which also include some rental units (e.g., borrowers
purchasing a duplex to live in one unit and rent out the other) will still be able to access
government-backed mortgage insurance with a 5 per cent down payment.
Moving to the New Framework
These adjustments to the mortgage insurance guarantee framework are intended to come
into force on April 19, 2010. Exceptions would be allowed after April 19 where they are
needed to satisfy a binding purchase and sale, financing, or refinancing agreement
entered into before April 19, 2010.
measured steps to support the long-term stability of Canada's housing market and
continue to encourage home ownership for Canadians.
"Canada's housing market is healthy, stable and supported by our country's solid
economic fundamentals," said Minister Flaherty. "However, a key lesson of the global
financial crisis is that early policy action can help prevent negative trends from
developing."
The Government will therefore adjust the rules for government-backed insured mortgages
as follows:
- Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
- Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
- Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
"There's no clear evidence of a housing bubble, but we're taking proactive,
prudent and cautious steps today to help prevent one. Our Government is acting to
help prevent Canadian households from getting overextended, and acting to help
prevent some lenders from facilitating it," said Minister Flaherty. "If some lenders
aren't willing to act themselves, we will act. These measures demonstrate the
Government is committed to taking action when necessary to support the longterm
stability of a sector that is so vital to our economy and the financial wellbeing
of Canadian families."
These adjustments to the mortgage insurance guarantee framework are intended to
come into force on April 19, 2010.
Backgrounder
Canada's Housing Market Remains Strong
Canada's housing market remains healthy and stable. According to theInternational Monetary Fund, our housing market is fully supported by sound
economic factors, such as low interest rates, rising incomes and a growing
population. Moreover, mortgage arrears—overdue mortgage payments—have also
remained low.
Today's announcement is part of the Government's policy of proactively adjusting
to developments in the housing market that could take root and cause instability.
These steps are timely, targeted and measured, and will reinforce the importance
of Canadians borrowing responsibly and using home ownership as a savings
mechanism.
Mortgage Insurance
Mortgage insurance (which is sometimes called mortgage default insurance) is acredit risk management tool that protects lenders from losses on mortgage loans.
If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the
property are insufficient to cover the resulting loss, the lender submits a claim to
the mortgage insurer to recover its losses.
The law requires federally regulated lenders to obtain mortgage insurance on
loans in which the homebuyer has made a down payment of less than 20 per cent
of the purchase price (also called high loan-to-value ratio loans). The homebuyer
pays the premium for this insurance, which protects the lender if the homebuyer
defaults.
The Government ultimately backs most insured mortgages in Canada. It is
responsible for the obligations of Canada Mortgage and Housing Corporation
(CMHC) as it is an agent Crown corporation. In order for private mortgage
insurers to compete with CMHC, the Government backs private mortgage
insurers' obligations to lenders, subject to a deductible equal to 10 per cent of the
original principal amount of the loan.
In October 2008, the Government adjusted its minimum standards for
government-backed, high-ratio mortgages, including:
- Fixing the maximum amortization period for new government-backedmortgages to 35 years.
- Requiring a minimum down payment of five per cent for newgovernment-backed mortgages.
- Establishing a consistent minimum credit score requirement.
- Requiring the lender to make a reasonable effort to verify that theborrower can afford the loan payment.
- Introducing new loan documentation standards to ensure that there isevidence of reasonableness of property value and of the borrower'ssources and level of income.
Measures Announced Today
Today, the Government announced three changes to the standards governinggovernment-backed mortgages.
Qualifying at a Five-Year Rate
Current interest rates are at record low levels, which has improved theaffordability of housing for Canadians. It is important that Canadians borrow
prudently and are able to manage their debt loads when interest rates rise.
Lender and mortgage insurers look at two key ratios when assessing the ability of
a borrower to make payments on a mortgage loan:
- Gross Debt Service (GDS) ratio—the ratio of the carrying costs of thehome, including the mortgage payment, taxes and heating costs, to theborrower's income.
- Total Debt Service (TDS) ratio—the ratio of the carrying costs of thehome and all other debt payments to the borrower's total income.Currently, the interest rate used to determine the mortgage payment for these calculationsis either the rate fixed for the term of the mortgage or, in the case of a variable-ratemortgage and mortgages with terms of less than three years, the greater of the contractrate and the prevailing three-year fixed rate.
borrowers qualify for their mortgage amount using the greater of the contract rate or the
interest rate for a five-year fixed rate mortgage when calculating the GDS and TDS
ratios.
This measure is intended to protect Canadians by providing them with additional
flexibility to support mortgage payments at higher interest rates in the future.
Limit the Maximum Refinancing Amount to 90 per cent of the Loan-to-
Value Ratio
Borrowers seeking financial flexibility can currently refinance their mortgage and
increase the amount they are borrowing on the security of their home up to a limit of 95
per cent of the value of the property. This type of refinancing lowers the borrower's
equity in their home. The adjustments today will lower the maximum amount of the
mortgage loan in a refinancing of a government-backed high ratio mortgage loan to 90
per cent of the value of the property, consistent with the principle that home ownership is
a tool for savings.
Discouraging Speculation by Requiring a Minimum Down Payment of 20
per cent for non-owner-occupied properties
This measure will require a minimum down payment of 20 per cent for governmentbackedmortgage insurance on non-owner-occupied properties purchased for speculation.
Currently, borrowers may purchase a residential property with a 5 per cent down
payment. Today's change will require a 20 per cent down payment for small (i.e., 1- to 4-
unit) non-owner-occupied residential rental properties. Borrowers purchasing owneroccupied
residential properties which also include some rental units (e.g., borrowers
purchasing a duplex to live in one unit and rent out the other) will still be able to access
government-backed mortgage insurance with a 5 per cent down payment.
Moving to the New Framework
These adjustments to the mortgage insurance guarantee framework are intended to comeinto force on April 19, 2010. Exceptions would be allowed after April 19 where they are
needed to satisfy a binding purchase and sale, financing, or refinancing agreement
entered into before April 19, 2010.