The federal government is moving again to tighten the rules on mortgage lending in Canada amid growing concerns that the housing market is overheated and household debt levels are climbing to perilous levels. Figures from Stats Canada show the average ratio of debt-to-disposable income climbed to 152%, up from 150.6% at the end of 2011.

Growing concerns is causing Ottawa to take action by reducing the maximum amortization for a government-insured mortgage from 30 to 25 years. The clamping down means that Ottawa will withdraw government insurance backing on lines of credit secured by homes.

 Reducing the maximum amortization on government backed mortgages will eliminate the 30-year mortgage for most borrowers in Canada. The change, which is expected to be unveil this morning will translate into higher monthly payment but result in the loan being paid off sooner.

 With the Bank of Canada expecting to keep the interest rates low for some time because of little sign of recovery, tightening mortgage rules is one way to make sure Canadians don’t get in over their head during a lengthy period of ultra-low interest rates and possible lost jobs.

Also part of the announcement is that Ottawa will no longer allow high-ratio mortgages over $1-million, and it will cap the gross debt service (which looks at a consumer’s total debt payments as a percentage of their income) at 39 per cent.

Finance Minister Jim Flaherty reduced maximum insured amortization to 30 years, and limited borrowing to 85 per cent of the property value in early 2011, this being the fourth time in four years that Ottawa has moved to cool the housing market by tightening mortgage rules. There has been no alteration to the minimum down-payment required to buy a home which stands at 5 per cent. Making a change to the down-payment at this point would probably prove to be too severe given the slow down in the market.

There are concerns that the changes could cause too abrupt a shift in the market and precipitate the housing market downturn that the government wants to avoid.

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