OTTAWA — The federal government is taking steps to crack down on runaway consumer borrowing with new rules that make it harder to take out a home mortgage and limit some types of loans.
The measures were necessary, Finance Minister Jim Flaherty said Monday, because a minority of Canadians are “borrowing to the max.”
It’s the third time that the finance minister has acted to restrain credit in the past three years — a period during which historically low interest rates have been fuel for rampant borrowing.
The new rules reduce the maximum amortization period to 30 years from 35 for new, government-backed mortgages with a down payment of less than 20 per cent, effectively lowering the amount Canadians can borrow on their first home.
The measure, which comes into effect on March 18, will increase the monthly payment on a $300,000 mortgage at four per cent interest by $105, according to the government.
As well, Ottawa will lower the limit on how much money Canadians can borrow using their homes as equity to 85 per cent of the total value from 90. And it will no longer insure lines of credit secured on homes as if they were mortgages, which should put pressure on banks to increase their standards when it comes to deciding who qualifies for such loans.
Most analysts praised the minister’s actions, but the opposition parties still criticized the government for its policies.
Liberal critic Scott Brison pointed out that it was Flaherty who ushered in longer-term amortization periods in 2006, which he is now reversing.
“Today’s announcement is an admission by Minister Flaherty that his policies helped create the personal debt crisis faced by Canadian families,” he said.
His counterpart with the NDP, Thomas Mulcair, said tightening is a good idea, but added the solution to the debt problem also includes the government acting to stop “29.9 per cent” interest rates on credit cards, and bank charges on ATM usage and other services.
Flaherty made clear there is not a debt crisis in Canada at the moment, even though household debt has reached a record 148 per cent of disposable income, a higher rate than currently exists in the United States.
But he said he was concerned that some Canadians were getting stretched and would feel the pinch when interest rates eventually rise.
“We are responding to a situation that could develop,” he told a news conference, “and we want to avoid that.”
“It’s obvious we could have gone farther. We have not touched down payment requirements, for example. This is intentional. We are trying to strike the right balance so that we do not create any sort of shock in the market, or any sort of dramatic pressure in the market.”
Ironically, the measures open room for Bank of Canada governor Mark Carney to keep interest rates low for a longer period, given that the threat of runaway borrowing has been lessened.
The central bank next pronounces on interest rates Tuesday, but most analysts expect Carney to keep the policy rate at one per cent until at least late spring.
CIBC’s chief economist, Avery Shenfeld, said the impact overall on mortgage lending will be “marginal.”
“It’s the difference between somebody borrowing $200,000 and $180,000 or 190,000,” he said.
“More dramatic would have been to raise the down payment, which would have a larger impact on people’s ability to finance their first home.”
The Bank of Montreal’s Douglas Porter said the measures are the equivalent of raising interest rates by about half a percentage point, but more targeted.
“This is way a way of not affecting a lot of innocent bystanders, including the manufacturing and the tourism sector, by putting more upward pressure on the Canadian dollar,” he explained.
Flaherty said he moved on home equity loans and lines of credit because some were not using the money to build equity into their residences, but on consumer spending.
“They are used to buy boats and cars and big-screen TVs, and that’s not the business mortgage insurance was designed for,” he said.
“Our measures will help improve the financial situation of households in Canada,” he added.
The tighter rules had been well flagged by both the federal government and the Bank of Canada, which have for months beat the drums on the risks of growing consumer debt.
In a speech earlier in the month, the bank’s deputy governor, Agathe Cote, noted home-equity loans as a share of overall household credit had risen by 170 per cent in the last decade.
The central bank has expressed concern that as Canadians pile on debt, not only do they expose themselves to coming higher interest rates or economic shocks, but they will no longer have sufficient disposable income to spend on other items, thereby potentially damaging the economy.
“If there were a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy, such as consumption,” Cote said.