Photo: City of Toronto Toronto, Ontario, Nathan Philips Square. image:37173:2::0

In an effort to ensure that the Canadian housing market – both in selling and financing – does not suffer from dramatic increases in mortgage defaults and foreclosures, the federal government has (July 9th) introduced several regulation changes. These measures are not aimed directly at consumer credit worthiness; rather, they are aimed at mortgage insurance that is required when an applicant falls below a certain threshold for mortgage consideration.

Unlike its southern neighbour, Canada has more regulatory control (some would say restrictive) over the actions and requirements from both financial lenders and consumers. Prior to 2007, it was possible to secure a home mortgage with little (or no) down payment and amortize said loan over 40 years; those clients considered to be high risk are / were required to purchase additional mortgage insurance. This additional fee serves as federal protection to the lender to offset any losses resulting from the sale of forfeit properties.

The current changes—to take effect in mid October—will enhance changes introduced in 2007. The major change, at that time, was the reduction of the minimum down payment required to avoid purchasing this insurance; it was lowered from 25 to 20 per cent. As both amortization and the possibility of 100 per cent mortgages were still possible, it is clear that the emphasis was on reducing the final cost to the consumer. It was predicted that the average savings per new mortgage holder would be $ 2000.

Wednesday's announcement strengthens the protection of lenders. Highlights of the new regulations are as follows:

• Cutting the maximum amortization period to 35 years from 40.
• Requiring a minimum down payment of five per cent, whereas loans for 100 per cent of the price are possible now.
• Establishing a requirement for a consistent minimum credit score.
• Introducing new loan-documentation standards.

The tightening of amortization and minimum down payment requirements are to be expected. What is shocking is that a "consistent minimum credit score" was not an established criteria before these changes. One can assume that the documentation standards have been introduced to enforce greater mortgage transparency, thereby ensuring that both client and lender are fully aware of the terms being agreed to.

In a press release, the Canadian Finance Ministry characterized these changes as, "a responsible and measured approach … to reduce the risk of a U.S.-style housing bubble developing in Canada." A comparably stronger economy, less volatile housing market, and rising overall personal incomes were also noted as protections against this. The release also noted that the current level of default home loans are 0.27 percent of all such products.

Hopefully these measure will ensure that responsible, affordable and reasonably termed home loans will continue to be available to the Canadian consumer.