Ottawa has tightened the rules for obtaining a government-backed mortgage, as it casts an eye towards expected future interest rate increases and the risks those pose for Canadian homeowners.

Finance Minister Jim Flaherty announced Tuesday morning that prospective homeowners will soon have to meet the requirements for a five-year, fixed rate mortgage -- as opposed to the three-year standard in place right now. The rule will apply even if they choose a mortgage with a lower interest rate and shorter term.

Flaherty told reporters gathered at an Ottawa news conference that the change will "help Canadians prepare for higher interest rates in the future."

"One must always guard against the temptation to take on more financial risk simply because interest rates are low. Our government is acting to help prevent Canadian households from getting overextended and acting to help prevent some lenders from facilitating it," he said.

Flaherty also announced Ottawa will also limit the amount of mortgage refinancing that homeowners can undertake.

"We will lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes," he said.

"This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up," he added.

"We are encouraging people to build equity over time, using homeownership as an effective way to save, rather than as a vehicle for quick cash."

The finance minister also announced that housing speculators will now have to put down a 20 per cent down payment on properties they will not be living in, to qualify for a government-backed mortgage.

But he said the government is not trying to crack down on investment properties such as rental units.

"What we're getting at is the speculation in multiple-condo markets, in particular," he said, making reference to incidents in the Vancouver and Toronto markets as examples.

Preventative measures

Flaherty said the changes, which are expected to come into force on April 19, were necessary to prevent future problems and he insisted they would not make it harder for Canadians to buy houses.

"The only restriction would be qualifying at a five-year, fixed-term basis, which is a credit qualification that a number of our chartered banks have already gone to," Flaherty said.

"I think that most prudent Canadians would want to have that level of ‘credit-worthiness,' of credit qualification, so that they could rest assured that their house would remain affordable -- and the mortgage remain affordable -- when interest rates rise, as they inevitably will."

Pointing to mortgage changes the Conservative government instituted two years ago -- including a minimum five per cent down payment for new mortgages and a maximum 35-year amortization period -- Flaherty said they also helped Canadians avert the kind of housing crisis seen in the United States in the current recession.

Economists had previously called for the minister to be stricter about who can get new mortgages, but warned the government not to put on the brakes to strongly, in order to preserve the fragile economic recovery. On Tuesday, several said they favoured the new rules brought forward by the government.

"Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent," Frank Techar, president, personal and commercial banking, BMO Bank of Montreal said in a statement.

Carleton University professor Ian Lee said he supported the changes, but said he would also like to see the required mortgage housing down payment doubled from five to 10 per cent.

"In my judgment, the most important predictor of risk in home ownership is the amount of down payment," Lee told CTV News Channel from Ottawa on Tuesday morning.

Lee said he was hoping the finance minister would increase the required down payment "to really take out that additional risk that is there, which is caused by the fact that interest rates are going to go up."

"And when they go up, some of these people will not be able to keep their house, because they will not be able to afford the payments," he said.

BNN's Michael Kane said Flaherty's position is that while there may not be a housing bubble immediately on the horizon, he wants to be proactive in preventing one from forming.

"What Mr. Flaherty is saying here, is that even though he doesn't see the bubble really forming at all, to put certain measures in place so one does not get the chance to build is the prudent thing to do," Kane said Tuesday morning from Toronto.

Overall, Flaherty said the Canadian housing market is "healthy and stable," with about two-thirds of Canadians owning their own homes.

"Our housing market… has been a source of strength for our country and a source of growing wealth for hardworking Canadians themselves," Flaherty said.

With files from The Canadian Press