The Canadian government is taking measures to curb speculation in the real estate market in order to prevent a property bubble.
Finance Minister Jim Flaherty announced that he is tightening mortgage rules to crack down on speculators and discourage homeowners from taking on too much debt.
The minister said he is responding to growing concerns that Canada’s housing market is overheating, although he stressed there is no bubble in the real estate market yet.
‘There’s no compelling evidence of a housing bubble but we’re taking proactive, prudent, measured and cautious steps to help prevent a housing bubble,’ he said.
As a result all borrowers will need to meet stiffer criteria to take out mortgages. In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five year fixed rate mortgage even if the interest they are paying is less. The government will also limit the amount they can borrow on their homes from the current 95% of the value to 90%.
And to discourage speculation, prospective homebuyers who want to purchase a property for rental purposes will have to come up with a 20% down payment instead of the current 5%. Flaherty said he has been told anecdotally of a tendency among speculators to purchase multiple condominium units and not live in any of them, which he says drives up prices overall.
Economists warned, however, that it will be difficult for lenders to determine on which side of the line buyers fall. There are also concerns that the measures, especially the higher affordability test, will hit first time buyers.
In practical terms, it means that on the average $337,000 home, a homeowner will need to have the financial means to absorb an additional $2,500 in mortgage costs a year, according to TD Bank.
Flaherty though said the additional cushion was needed because interest rates, which are at historic lows, will go up. Most economists expect the Bank of Canada to increase rates in the summer.
The Canadian Association of Accredited Mortgage Professionals said it supports the amendments, calling them preventative measures against possible future risk. The new rules are intended to come into force on April 19.