OTTAWA - Ottawa is tightening the rules for government-guaranteed mortgages that will limit the maximum amortization period to 35 years and require a minimum down payment in a bid to prevent a meltdown like the one in the U.S. subprime mortgage market.

The Finance Department said Wednesday it will no longer guarantee 40-year mortgages and will require a minimum down payment of five per cent of the value of a home.

Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent - in other words the buyer has borrowed all the money to buy a home and then gets insurance coverage on the whole amount.

The changes announced Wednesday will cut this ratio to 95 per cent. Borrowers may still borrow the five per cent down payment, but it will not be insured under the new scheme.

Finance spokesman Jack Aubry said the moves will strengthen the Canadian housing market and reduce the risk of a housing bubble.

"Limiting the use of 40-year mortgages and requiring a minimum downpayment will help ensure that people build real equity in their home faster," Aubry said.

The new limits, which are set to take effect Oct. 15, will affect only new government-backed insured mortgages.

Canadians who already hold mortgages won't be affected by the changes.

In April, Bank of Canada governor Mark Carney raised his concerns about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.

In other words, mortgages that are designed to take 40 years to fully repay if the borrower sticks to the regular schedule of instalment payments.

Carney told a Commons committee that the central bank was watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.

In the United States, imprudent lending by banks and financial companies to high-risk borrowers at low rates created a housing bubble that eventually exploded when mortgages renewed at higher rates and borrowers couldn't pay and defaulted.

In Canada, defaults of bank-originated mortgages are extremely low - well below one per cent of the total, according to figures compiled by the Canadian Bankers Association.

The collapse in the U.S. housing market led to broader troubles in the U.S. economy, reducing demand for Canadian exports such as lumber and autos. It also led to a corporate and consumer credit crunch that is still being felt by ordinary Americans and companies.

In Canada, the government said Canadian banks and other lenders have not written many government-backed mortgages to borrowers with low credit scores, but to ensure this continues the changes will establish a credit score floor of 620.