With mortgage rates near all-time lows and the government of B.C. saving first-time buyers up to $7,500 by increasing the First Time Home Buyer’s Property Transfer Tax limit from $425,000 to $475,000 (and partial savings up to $500,000), now could be the perfect time to finally take the plunge into home ownership.

If you are thinking of obtaining a loan of any kind, like a new mortgage, vehicle loan or any other loan, it is important to understand how the banks think. By setting up your finances as optimally as possible, you can increase your chances of getting approved instead of declined. Here are some tips for increasing your borrowing power in 2014.

Also, having all of your documents ready may allow you to make a more competitive offer on a timesensitive deal like a foreclosure in real estate. Here are some of the documents you will likely need: Two years of T1 Generals (tax returns filed to the CRA); Two years of Notice of Assessments (document sent back from the CRA once income taxes have been filed); Job letter and paystubs if an employee; Mortgage statements and lease agreements if you own real estate; And more, depending on your circumstances.

Find out what your credit score is

It is always a good idea to obtain a copy of your own credit bureau report ahead of time. Every time a lender does a credit inquiry, your credit score will take a small hit. Learning ahead of time whether your credit score is good or bad will allow you to prepare and fix anything that may appear on your credit rating.

You can obtain a copy of your own credit rating yourself at Equifax.ca.

Get pre-approved

If you plan on purchasing real estate or a vehicle in 2014, it would be a good idea to discuss your options with your broker or bank to learn more about what you qualify for. You don’t want to be wasting your time looking at making a major purchase only to find out you won’t qualify for the loan you need to make that purchase.

If looking to obtain a mortgage, get a pre-approval so that you will have a sense of what your borrowing cost will look like and lock in your interest costs.

Investigate RRSPs

If you are a first-time homebuyer, you can pull out up to $25,000 per person out of your RRSPs to be used towards the purchase of your first home. Important points about the first time homebuyer plan are: The $25,000 is tax free, but must be repaid into the RRSP over a 15-year period.

The funds have to be in the account for 90 days before you pull them out, so make sure if you plan on buying a house in the spring, you make an RRSP contribution this fall.

You can create “money out of thin air” by making an RRSP contribution shortly before purchasing because of the tax refund.

Example: If you deposit $20,000 into your RRSP and earn between $30,000 and $62,500 annually, you will get an approximate $6,500 tax refund once your taxes have been filed. You will now have $26,500 available for the down payment, not $20,000.

Filing your taxes

Generally, the sooner you file your taxes, the better. There are some exceptions, however.

Lenders will generally use either your minimum guaranteed income (common for salaried employees) or what you have averaged for the past two years on your income taxes (the net income on Line 150 on your taxes).

So, if you had a very good year in 2013 and have a variable income (self employed, or a large amount of your annual income is derived from commissions, bonuses, etc.) you should file ASAP. However, if 2013 was a very poor year, you can still get away with using your 2011 and 2012 income taxes to qualify for a mortgage or other loan until the summer. If you had a bad year, you may want to buy in the first half of 2014 instead of waiting.

Presales completing in 2014

If you have a presale completing in 2014, it is important to prepared ahead of time. The developer will usually give you an idea of the estimated closing date well in advance, but the dates often change.

Make sure you are prepared in advance. Once the developer is ready to close, they usually only give about 10 business days’ official notice which means you should already have your financing arranged. Rates can be held for 90-180 days depending on the lender (most lenders are 90-120 days) so start early to make sure you get the best possible rate by the completion date.

If you are buying a new presale that doesn’t complete until after 2014, make sure you find out if the developer has arranged a rate hold guarantee with a bank. The rate will usually be higher than current market rates but it’s important to have a worst-case scenario. Financing is harder than it has been in a long time. Make sure you get the update on what is new and how some of the new rules may impact you. Particularly for real estate investors, it is much more difficult to qualify for rental properties.

Source: Kyle Green is a mortgage broker with Mortgage Alliance Meridian Mortgage Services Inc.

The Conference Board isn’t buying the notion that Canada’s housing market will suddenly crumble, saying the most likely outlook is for a modest decline nationally and in some specific markets.

The Ottawa-based think-tank argues in a comprehensive new look at real estate in Canada that the conditions for a crash simply don’t exist, despite numerous reports that the market is overbuilt and overvalued.

Rather, the report argues that with the possible exception of Toronto, housing starts the past three years have been roughly in line with the 20-year average.

Even in Toronto, there is only a “borderline” case that it could be overbuilt.

“At this point in the housing cycle, there is a risk that Canadian housing prices in some market segments are due for a modest correction,” the report states.

“Nevertheless, we believe that continued population growth, additional employment gains and modest mortgage rate increases will limit potential price declines in 2014 and 2015.”

There is a case for more dramatic price adjustment further out if higher mortgage rates start crimping affordability, the Conference Board says, but even then it is likely to be a soft rather than a hard landing.

In recent years, some economists and international organizations such as the OECD, the IMF, Deutsche Bank and The Economist magazine have described Canada’s housing market in stark terms, characterizing it as among the priciest in the world based on historical averages and other metrics.

But the consensus of economists within Canada has tended to be more subdued. Last week, the Canadian Real Estate Association also predicted a slowdown as mortgage rates start edging up later in the year, but it still saw the market overall growing in 2014 and 2015.

The Conference Board says fears of a housing bubble about to burst in Canada are exaggerated.

It says some of the evidence cited by correction hawks, including comparing home prices as a multiple of rental costs, don’t take into account historically-low mortgage rates that keeps affordability steady. Citing Toronto, it notes that in 2013 mortgage payments consumed less than 20 per cent of average household income, the same as in 1993.

“Mortgage costs, not just house prices, are the principal deciding factor for potential homebuyers,” says Robin Wiebe, the think-tank’s senior economist.

Even when mortgage rates do start rising, the Conference Board believes it will happen gradually and over an extended period. For instance, it forecasts rates with only a gain of 200 basis points — two percentage points — by 2017 or 2018.

But at current low rates, the typical homeowner on a posted five-year rate will have paid down $42,104 principal on a $100,000 in mortgage debt, so affordability won’t be seriously impacted once it comes time to renew at a higher rate.

The Conference Board provides an outlook on six major cities:

— Vancouver: Moved back into balance last spring. Recent price gains will give way to slower advances in 2014.

— Calgary: A approaching sellers’ conditions, noting strong price gains last year.

— Edmonton: Balanced, with brisk resale and price growth activity last year.

— Toronto: Balanced with healthy price growth. A major correction is difficult to see given solid employment and population growth.

— Ottawa: Market cooling due to falling employment from the government sector, flatter sales and tempered prices.

— Montreal: Flirting with buyer’s market conditions with sales and average prices having dropped somewhat last year.

Source: Julian Beltrame, The Canadian Press

The average cost of a Canadian home hit a record high of $388,553 in January. This price is 9.5 per cent higher than last year. The average cost of a home in cities such as Toronto and Vancouver rose to $526,528 and $606,800. Over the last ten years Canadian real estate prices have soared 84 per cent. With prices sky-high in some cities, the following tactics could help make buying your first home just a little bit easer.

Get a mortgage pre-approval before you start house hunting.

Before you start visiting open houses or checking out properties with a real estate agent, it’s important to visit your bank to see which houses you can afford. This ensures you’re shopping within the correct price range. Many people will need to take out a mortgage to buy property, but the amount you are eligible for is based on multiple factors including credit rating, household income and monthly expenses. Before you begin property hunting, visit a financial institution. This way you’re able to hold a competitive rate for between 30 to 120 days.

Buy a home with your parents or a buddy.

Young adults are increasingly relying on help from family members to buy a home. About 27 per cent now expect it. In a hot housing market, real estate agents have seen ‘gift letters,’ which detail the money a family member will contribute to assist them with mortgage approval, or simply thousands of dollars in hard cash. If a family member decides to loan the money rather than give it as a gift, parents should establish payment requirements in a legal document to ensure that everyone is satisfied.

Buy a home in a more affordable city.

House prices in Vancouver and Toronto are climbing to unaffordable levels for many people, but this doesn’t mean you have to live in these cities. Near Toronto, the housing markets in Ajax, Brampton, Milton and Mississauga are heating up. These are popular placees to buy a bigger lot, but potential homebuyers need to account for other costs (like gas and car insurance), as well as commuting times should their work remain in Toronto.

Buy a home that you can use as an income property.

You could buy a property you can live in but also split into a rental unit. The best outcome is if your renter’s payment covers your mortgage costs, but there are some important points to consider. First, you need to determine how comfortable you are living in close proximity with your tenants. For example, are you comfortable having a boarder live down the hall, or would you prefer to live on separate floors and use different entrances? Many people would prefer a semi-detached home with a separate entrance, bathroom and kitchen. If these don’t figure in the property you’re eyeing, you’ll need to budget for renovation costs.

Negotiate your house price and insurance.

Some people don’t feel comfortable negotiating, but it can save you a lot of money. First, the more information the better. Research the value of other houses. Chances are an identical house has been sold in the neighbourhood and you should check that property’s value against the one you’re considering. Understand why the seller is selling and shape your bid towards his or her plans. Also, understand that while the size of your bid is important, it isn’t always the deciding factor because some homeowners care how the new owner will treat the property.

When you purchase insurance, there are three types to consider: basic, standard and comprehensive. An independent broker can help you get the best rate and if you bundle your auto and home insurance with the same company you could receive up to a 15 per cent discount.

Tap into your RRSP for first-time home buyers.

First-time homebuyers can withdraw $25,000 from their RRSP as a part of the federal government’s homebuyers plan. If you’re buying a home with a partner, you can both take out $25,000 from your individual plans. If this equals a 20 per cent down payment, you can avoid mortgage default insurance, which tacks on several more thousands of dollars to your mortgage. If you do tap your RRSP, there is a tax loophole that lets you receive up to $20,000 in tax refunds. But one drawback with using your RRSP is that you must repay the amount you withdraw within 15 years or you will face a penalty based on your personal income tax rate.

Buy a smaller space.

One in eight households lives in a condominium. With the gap between the price of a house and a condo hitting record highs in Toronto, more families are becoming condo dwellers. The average size of a home in Canada was 2,300 square feet during the mid-2000’s. But that number has now dropped to 1,900 square feet and will probably keep shrinking. The size of your family will determine the size of your home. While you may have grown up in a single detached home with a backyard, in housing markets such as Vancouver and Toronto it’s important to manage your expectations.

Budget for your closing costs.

Tapping into a mortgage offers homeowners leeway in paying off their property, but along with your down payment there are other upfront closing costs you need to budget for. The Canada Mortgage and Housing Corporation suggests that you set aside an additional 1.5 to 4 per cent of your property’s purchase price to account for closing costs. Closing costs include a land survey that ranges from $1,000 to $2,000, an independent home inspection costing from $350 to $600, legal fees for a title search and paperwork that run to about $1,000, and a land transfer tax that varies based on your city and GST/HST.

Source: Josephine Lim, MSN Money

The five-year fixed mortgage at an advertised rate below three per cent has returned to Canada for the first time since last year.

Meridian Credit Union, the largest credit union in Ontario, announced this week it had lowered its benchmark five-year fixed-rate mortgage to 2.99 per cent.

According to market surveys carried out by RateSpy.com and Cannex.com, that is the lowest advertised rate for the popular mortgage term in Canada.

Meridian’s mortgage special is available just in Ontario, but it appears to have few other restrictions.

Earlier this month, MortgageBrokerNews.ca reported that two mortgage brokers — Verico Butler and Advent Mortgage Services — were also offering 2.99 per cent five-year fixed mortgages.

Brokers are often able to get mortgage rates for their clients that are lower than what big lenders offer. But sometimes, super-cheap mortgages have severe restrictions on such things as rate holds and prepayment privileges.

Fixed mortgage rates have been creeping down in the last month at most lenders as Canadian bond yields have been falling. Fixed mortgage rates tend to track bond yields.

The yield on Canada’s five-year government bonds has fallen 33 basis points so far this year to 1.62 per cent.

Last year, some big banks attracted the ire of Finance Minister Jim Flaherty for aggressively pushing 2.99 per cent five-year mortgages. He was worried that cheap financing would stoke a housing market that some economists were calling overheated and overvalued.

Since credit unions are provincially regulated, Flaherty has no formal power to pressure Meridian over its current promotion.

Source: CBC News

The Bank of Canada kept its benchmark interest rate steady at one per cent today, continuing its longest stretch of inaction on record.

Canada’s central bank last changed its target for the overnight rate in late 2010, when it was raised to its current level.The bank announces its latest policy decision on interest rates every six weeks, and the bank has now stood pat for 26 consecutive policy meetings.

In a statement accompanying Wednesday’s decision, the bank said it expects inflation to remain lower than previously anticipated for the next little while. It also said it expects a soft landing in the housing market.

The bank wasn’t expected to raise or lower rates on Wednesday, but watchers are closely parsing the statement to gauge which direction the bank is heading in — a rate hike to cool inflation, or a rate cut to stimulate the economy.

Wednesday’s statement suggests the bank is leaning toward the former.

The loonie plunged in the immediate aftermath of the news, shedding about a third of a cent to trade at 90.70 cents US.

Source: CBC News

The spring housing market is expected to bring on a new battle from mortgage lenders as they compete for what has become a shrinking pie in the form of lower real estate sales.

Bank of Montreal struck first on Friday with a five-year closed mortgage rate of 2.99% — down from 3.09% and now the lowest published rate among the big banks — with sources indicating the financial institution’s mortgage specialists are armed with discretionary power to go as low as 2.89%.

As the banks battle it out for consumers skittish about jumping into what more than one analyst sees as an inflated housing market, lenders know their costs have dropped in the past few weeks. The Bank of Canada’s five-year bond rate is in the 1.3% range after being almost at 1.6% at the end of January.

“Perhaps there is pressure to lower rates,” said Gregory Klump, chief economist with the Canadian Real Estate Association, about banks trying to capture customers in a slowing market. “It remains to be seen how much [the real estate market] is going to slow.”

While some predict a collapse in the housing market, so far prices have remained firm and sales have dipped only in the single-digit range from a year ago.

CREA said last month that January prices were up 2% year-over-year, while sales were down 5.2% during the same period. On a seasonally adjusted basis, sales actually climbed 1.3% from December to January.

It’s unclear whether a new round of mortgage rate cuts will have an impact on consumers already used to a prime rate of 3% and long-term mortgage rates even below that.

“I don’t think low rates change their mind on whether they are going to buy or not,” Mr. Klump said. “What it does change is how much property they can afford. The most important thing at this point in the cycle is how confident consumers are of economic prospects going forward.”

Source: Garry Marr, Financial Post

The Bank of Canada is keeping its trendsetting interest rate anchored at one per cent for the remainder of the year and sending a message that it still believes the cost of borrowing in Canada will go up at some point in the future.

The decision by the central bank’s policy setting panel was in line with the expectations of markets and economists, who had given only low odds to governor Mark Carney removing a mild bias towards raising rates sometime.

Canada’s dollar gained strength after the announcement. It was up 0.19 of a cent to 100.7 cents US — slightly higher than just prior to the central bank’s announcement.

The bank’s statement Tuesday suggests it is looking through the disappointing third quarter result as a temporary aberration.

Last week, Statistics Canada reported the country’s gross domestic product output had slowed to 0.6 per cent — about half what the bank had predicted in October, and the weakest result in more than a year.

The bank’s statement Tuesday said that “economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector” — referring to some maintenance shutdowns.

“Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013. The expansion is expected to be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.”

Tying improved conditions to 2013 suggests governor Carney, who has announced his intention to step down in June to take charge of the Bank of England, now realizes the economy is unlikely to live up to his 2.5 per cent hopes in the current fourth quarter as well.

In a bit of a surprise, Carney says he is not as yet convinced the recent cooling in housing activity in Canada, and slowdown in credit accumulation, represents a fundamental shift.

On Monday, Finance Minister Jim Flaherty said he was pleased housing was moderating and that Canadians were starting to pay off debt, a shift in the credit and mortgage market he attributed in part to his decision to tighten borrowing rules in July.

Carney says, however: “It is too early … to determine whether the moderation in housing activity and credit will be sustained.”

That is likely because the bank expects to keep interest rates, and as a result borrowing costs, at historic lows for likely another year.

Part of what has Carney in a holding pattern, both in terms of rates and his language, is that he does not know the outcome of the so-called fiscal cliff negotiations in Washington. Canadian policy-makers say if no deal is reached in the next month to extend tax cuts and program spending, the U.S. economy could take a battering amounting to about four percentage GDP points next year, sufficient to send it and likely Canada back into recession.

As it is, Carney said the uncertainty over whether Washington will be able to avoid figuratively going over the cliff is already impacting the economy.

Otherwise, not much has changed in the past month or so, the bank says. Europe is still in recession, the U.S. is recovering but at a gradual pace and Chinese growth appears to be stabilizing. If there is good news for Canada in all this, it’s that commodity prices have remained elevated, which helps the country’s terms of trade.

For many economists, those conditions might warrant the central bank jettisoning its pretence that it will raise rates “over time,” and acknowledge a rate cut may equally be in the offing in the next year or so.

But Bank of Montreal economist Doug Porter said in a note Tuesday morning that Carney will want to await the results of the fiscal cliff talks in Washington, and is holding his fire — if he has any to shoot — until the announcement date on Jan. 23 when he knows better the situation.

Tuesday’s decision was the 18th consecutive time Carney has kept the policy rate at one per cent, comprising over two years, the longest stretch of stability since the 1950s.

Source: Julian Beltrame, The Canadian Press

Bank of Canada governor Mark Carney is suggesting interest rates will likely rise before the end of 2014.

It’s one of the clearest indications Carney has given as to when he might raise the bank’s key benchmark, which has been held at one per cent for more than two years.

Responding to a question in the Commons finance committee Tuesday afternoon, the bank governor said the bank’s current thinking was that monetary policy will need to be tightened before 2015.

Last week, Carney inserted the phrase “over time” to give markets guidance on when the bank’s trendsetting rate might be increased. Tuesday’s response was somewhat more detailed, but still pointed to no immediate plans.

“We have in this projection … some modest withdrawal of monetary policy stimulus over the course of the projection, which runs until the end of 2014,” he said. “In other words in advance of 2015.”

Carney added that whenever he does move, it will be when global and domestic factors dictate. And he reiterated his recent guidance that he will also take into account household debt in his decision.

At the moment, he said the country still needs super-low interest rates to stimulate the economy and create jobs.

Canada may have recovered all the jobs it lost in the recession, and added an additional 380,000, he said, but the economy still has a way to go before returning to what would be considered full employment.

“We are in still in position where there are more Canadians who want to work than are working, and the level of involuntary part-time (workers) is still elevated,” he explained.

“They illustrate a degree of slack that still exist in the labour market, which is one reason our monetary policy continues to be and should be accommodative.”

Most private sector economists have pencilled in late 2013 or early 2014 for the first bank action.

The bank governor was appearing before the committee to explain his latest economic outlook released last week that projected growth of 2.2 per cent for this year, followed by a 2.3 per cent advance in 2013 and 2.4 in 2014.

That is slightly more optimistic than the economists’ consensus estimate handed to Finance Minister Jim Flaherty on Monday for the government’s fall update projections, which will be released in a few weeks.

Carney continued to blame global factors for most of the drag on the economy. But he said government restraint is also contributing to slower growth, although not as much as some have suggested.

He estimated the public sector will contribute about 0.3 percentage points to growth in 2013 and 2014. That’s about half the historic level and well down from when Ottawa and provincial governments were pumping billions into the economy during the 2008-09 recession and early stages of the recovery.

“So it’s positive but not as much as previously,” he said. Government restraint was a modest 0.2 percentage point constraint in 2012, however, the bank report shows.

Carney even ventured to assess the economic impact of the destruction caused by superstorm Sandy, which early estimates put at $20 billion.

While the economy will take a hit immediately, over the long term needed reconstruction in the eastern U.S. states will largely recoup the losses.

“There are activities that can never be redone, for instance a visit to a restaurant. Then there is restructuring (which creates economic activity). In general, it tends to be a relatively negligible impact over time,” he said.

Source: Julian Beltrame, Canadian Press

The Toronto and Vancouver housing markets have cooled rapidly in the wake of Ottawa’s latest bid to stop a bubble, with many first-time buyers knocked out of the running.

Finance Minister Jim Flaherty put the July 9th changes into effect to curb growing mortgage debt levels and take some steam out of house prices. Among other things, the new rules cut the maximum length of insured mortgages to 25 years from 30.

The changes have sparked a debate in Canada. Some industry players and economists worry that the impact will be so widespread and long-lasting that they want Mr. Flaherty to consider rolling some of them back. But with prices that some still deem overvalued and new fears over consumer debt, others say the changes aren’t enough and must be followed by a hike in rates.

Among the latter is Toronto-Dominion Bank chief economist Craig Alexander, who estimates that national home prices are 10 to 15 per cent too high.

He released a report last Thursday predicting the July changes will shave three percentage points off prices and five points off sales by next year.

“Our models suggest that had the government not tightened lending mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160 per cent this year – the level that households in the U.S. and U.K reached before sending their economies and housing markets into a tailspin,” Mr. Alexander wrote.

While debt burdens are lower than they would have been, they’re still at troubling levels. Moody’s Analytics said in a separate report that economic headwinds will increasingly cause consumers to struggle with their debt loads over the next few years.

And although the mortgage insurance rule changes have curbed house sales and debt levels somewhat, the impact on prices has been relatively fleeting, Mr. Alexander said. Without rate increases, consumers still have a strong incentive to take out large mortgages, fuelling overvalued prices, he argues.

The impact of the changes is predominantly being felt by first-time home buyers because they are typically the ones who require mortgage insurance. Insurance is mandatory in Canada for borrowers who have a down payment of less than 20 per cent, which has traditionally been about 35 to 40 per cent of the market.

Brian Hurley, the CEO of Genworth Canada, the second-largest mortgage insurer, said business slowed in August as a result of the rule changes. He would like Ottawa to revisit the rules later this year, and consider reversing some of the changes.

“These are pretty dramatic changes, and I think they’re getting close to the tipping point,” he said in a recent interview. “We see really qualified first-time home buyers with very high credit scores now not meeting the bar because they can’t afford a 25-year amortization. These people should be getting a home.”

Eric Lascelles, chief economist at RBC Global Asset Management, approves of most of the rule changes, but said there is a risk that they are being overdone to compensate for ultra-low mortgage rates.

“I wonder if the drop from 30 to 25 years amortization might be regretted in a decade when interest rates have normalized and 25-year-olds are being told they cannot make mortgage payments past the age of 50, even though they expect to work until 65,” he said in an e-mail.

Traditionally, the banks have applied mortgage insurance rule changes to all mortgages – even those with large down payments that don’t require insurance. But that hasn’t been the case this time, Mr. Alexander said.

“The banks are basically not applying the 25-year limit to the non-high-ratio mortgages,” he said in an interview. “That’s one of the reasons why the mortgage insurance rule changes had a more muted impact on the market, because really the segment that’s being significantly hit is the first-time buyers.”

Jim Murphy, the CEO of the Canadian Association of Accredited Mortgage Professionals, said that while Mr. Alexander’s prediction that the changes will dent sales by five percentage points could be correct, the impact on the insured portion of the market appears to be more like 15 per cent. “It’s having a bigger impact on first-time buyers,” he said.

On Thursday, the Toronto Real Estate Board said sales of existing homes in the country’s most populous city fell almost 12.5 per cent in August from a year ago. But the average price rose by almost 6.5 per cent, to $479,095.

One day earlier, Vancouver’s real estate board said August sales were the second-lowest level for that month since 1998, while the average price of a home in the Greater Vancouver Area was down 0.5 per cent from a year ago.

Source: Tara Perkins, Globe and Mail

TD Bank says tighter mortgage rules should do the job of cooling Canada’s hot housing market in the short term, but higher interest rates will be needed to return the market to saner levels.

The bank’s chief economist Craig Alexander estimates the new rules, which went into effect July 9, will shave five percentage points off sales activity and cut prices by 3% on average during the second half of this year and early 2013.

In the next three years, he expects the combination of the tighter rules and anticipated modest increases in interest rates will result in a 10% price correction on homes.

While it is early, there are already tentative signs that the new rules have tempered sales, if not prices, especially in the country’s hottest markets — Toronto and Vancouver.

The Toronto Real Estate Board reported Thursday that sales of existing homes in the greater municipal area fell 12.5% from last year, although the average price of $479,095 was 6.5% higher.

Meanwhile, the Vancouver board said sales dropped 30.7% in August, while the average price was only 0.5% lower at $609,500.

In July, Finance Minister Jim Flaherty reduced the amortization rate on new insured mortgages to 25 years from 30, bringing the maximum period for paying off a home back to the historic level. It was the fourth time Flaherty had tightened mortgage rules in as many years, incrementally dropping to amortization period from the high-water mark of 40 years.

Alexander says the latest moves, which hike mortgage costs by $140 a month on the average priced home, may be even more effective than the previous efforts in slowing the market.

But if the experience of the previous three moves are any guide, the slowdown will be temporary, lasting a few quarters, after which Canadians will dive back into the market.

For a longer lasting solution to the overheated market, Alexander said Bank of Canada governor Mark Carney will need to hike interest rates to make borrowing more difficult and expensive.

“Interest rates simply cannot stay at current levels indefinitely,” he says in the paper.

On Wednesday, Carney kept the trendsetting policy rate at one%, marking two years that it has remained at the super-low level, and few economists expect him to act before mid-2013.

Canadians have taken advantage of the cheap borrowing costs to buy homes, cottages, cars and other consumer items, but the result is that household debt has hit record levels at 152% of disposable income.

Alexander says debt would even be higher if Ottawa hadn’t begun tightening mortgage rules in 2008.

“Our models suggest that had the government not tightened mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160% this year,” he said.

That’s about the level the U.S. and the United Kingdom reached before the collapse, although not all factors are similar.

Alexander says he believes the latest rule changes would trim about one percentage point off credit growth.

Source: Julian Beltrame, Canadian Press