Changes coming to Canadian mortgages

The Finance Department announced yesterday that it would shorten the maximum amortization on government-backed mortgages from 40 to 35 years, in an effort to prevent a housing bubble in Canada. The maximum was raised in 2006 from 25 to 40 years, in response to the boom in demand for Canadian real estate. In addition to shorter amortizations, the minimum down payment required will be raised from 0% to 5%.

These changes come into effect on October 15, which means we can likely expect an uptick in home purchases over the next few months, as buyers look to sneak in under the wire with the old lending rules. After that, things may cool off a bit with the tighter rules.

I think this is a good idea in principle, but I wonder a bit if it's too little, too late. We've essentially had two years of relaxed lending rules to rack up a lot of long-term, high-ratio mortgages, and drive up housing prices. Will this change really work to make buyers think twice about the costs of homeownership? Also, although the new rules will be tighter, they still allow a 35-year, 95% mortgage, which is still a pretty highly leveraged position.

In Canada, the saving grace of our real-estate situation is the near absence of sub-prime lending (the Finance Department pegs this at about 5%). Most of the people who take out a mortgage to buy a home in Canada actually meet prescribed lending criteria, and they know the terms of their mortgage (as opposed to ARMs and negative-amortization loans). So we're likely not looking at the same default and foreclosure situation that we've seen in the U.S. over the past year.

The future of real estate prices in Canada, however, is far from certain. It should be an interesting ride.