With Canadian house prices rising and sales booming, the government is "acting to prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it," says Minister of Finance Jim Flaherty. New mortgage rules make it a little tougher for buyers to qualify for high-ratio mortgages, and are designed to discourage speculators.

After a brief lull early in 2009, Canada’s housing market has been on a roll, with double-digit year-to-year house price increases across the country. A combination of low interest rates and few new listings has driven up prices and caused multiple bidding scenarios in many communities. This has prompted some analysts to suggest that the housing market is forming a bubble that could soon burst, as happened in the United States.

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

If you are taking out a mortgage with less than 20 per cent of the purchase price of the home (a high loan-to-value ratio loan), federal law requires lenders to obtain mortgage insurance on that loan. You must pay the premium for this insurance, which protects the lender if you default.

The new rules include three major changes for these government-backed insured mortgages.

First, all borrowers must meet the standards for a five-year fixed-rate mortgage, even if they are taking out a mortgage with a lower interest rate and a shorter term. This rule is designed to make sure buyers will be able to pay if and when interest rates rise. According to TD Bank Financial Group, under the former rules, buyers were income-tested with a qualifying interest rate of the three-year posted rate. By testing against the five-year fixed rate, it will ensure that individuals could absorb a hike of three percentage points.

"The tighter rules do not mean the impacted individuals will not buy," says Craig Alexander, TD Economics senior vice-president. "They will simply have to limit the size of home they purchase." As an example, he says that on a home costing $337,000 (the national average), a buyer with five per cent down would require about $9,200 more in annual income to qualify under the new rules – or $68,838 in income, up from $59,626. For a $200,000 property, a buyer with five per cent down would need $5,467 more.

The second rule change restricts mortgage refinancing to 90 per cent from 95 per cent of the value of the home. This is a move, say some analysts, to ensure that "homeowners don’t use their homes as an ATM" and draw equity from their homes back to the five per cent they originally put down on their property. "Home ownership is a tool for savings," says the government.

Alexander says that the impact of this rule will be "quite limited" because less than one-third of refinancing is done by people with mortgage loans in the 90 to 95 per cent range.

Finally, the government will now require a minimum down payment of 20 per cent for those buying non-owner-occupied properties. Borrowers who buy a building that they will live in but that also includes some rental suites (such as a duplex where they live in one unit and rent the other one) will still be able to buy with five per cent down.

"This measure is likely aimed at tempering speculative buying of real estate by reducing the leverage available to buyers," says Alexander. "It will, however, also impact individuals buying real estate for investment purposes more generally, including those looking for rental properties." He says this change could impact on five to 15 per cent of new mortgage originations.

The mortgage rule changes will come into force on April 19. Not everyone is thrilled with the changes, including many in the development industry, but Alexander says, "boom/bust cycles in real estate are not desirable for anyone. The optimal outcome is moderate sales growth, accompanied by sustainable price increases, which keep affordability accessible to potential buyers, and within a market that provides the right incentives for debt management." He says the regulatory changes "seem consistent with these objectives."

Published: March 2, 2010

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Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .