Concerns that cracks were beginning to appear in the foundations of Canada's housing market were behind the government's surprise decision to crack down on loose mortgage conditions ushered in less than two years earlier, officials and experts say.

Starting October 15, 2008, Canadians will no longer be able to purchase a home with a government-backed mortgage with a 40-year amortization and no down payment.

Instead, mortgages will be limited to 35 years and the government will only insure 95 per cent of the value of the home, meaning buyers will need to come up with at least a five per cent down payment. As well, borrowers must demonstrate that debt servicing costs are no more than 45 per cent of gross income and have a good credit rating.

Currently, homebuyers can get government-backed insurance on mortgages, in which the loan-to-value ratio is up to 100 per cent. Under this scenario, the buyer has borrowed all the money for a home, and is covered by insurance for the entire amount.

Under the new scheme, homebuyers could still borrow the five per cent down payment -- but it won't be insured.

The Canadian Finance Department says reducing the amortization period from 40 years to 35 years on a $200,000 mortgage, for example, with a six per cent interest rate, would increase the borrower's monthly payment by $41. The borrower would also save $49,000 in interest payments.

As home prices have soared, longer-term mortgages became increasingly popular with homebuyers seeking lower monthly payments. The maximum amortization period was extended from 25 years to 40 years in 2006.

According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 37 per cent of new mortgages last year were for terms of longer than 25 years. But while 40-year-mortgages stretch out monthly payments, they can also dramatically increase the cost of a mortgage over its lifetime.

But while most in the housing sector welcomed the announcement, they also questioned the timing. The Canadian housing sector is cooling after six torrid years of growth.

Bank of Montreal deputy chief economist Douglas Porter said the decision should have been made a year ago, when Canada's housing market was likely exhibiting signs of a bubble as both prices and starts increased by double-digits over the previous year.

Ottawa said the changes were a precautionary measure designed to head off a U.S.-style subprime mortgage crisis, not an indication of underlying problems in the Canadian system.