Changes to down payment requirements coming February 15, 2016

15 December 2015
Life and the City

Courtesy of James Robinson, Mortgage Agent - Dominon Lending Mortgage Watch

New Mortgage Rules

On Friday December 11th, Finance Minister Bill Morneau announced changes to down payment requirements. Effective February 15, 2016, the minimum down payment for new insured mortgages will increase from 5% to 10% for the portion of the house price above $500,000. The 5% minimum down payment for properties up to $500,000 remains unchanged.

Homes priced at more than $1 million, by law, require a minimum down payment of 20%. The recent announcement therefore focuses on homes priced between $500,000 and $1 million.

A closer look at these changes and some analysis of market demographics makes one realize that this latest change in mortgage rules does not have the “end of the world” implications that might be assumed. First, let’s eliminate the groups that this will have no impact on:

1. Investors purchasing a rental property – no change

2. Purchasers of homes over $1,000,000 – no change

3. Purchasers of homes up to $500,000 – no change

4. Existing homeowners refinancing – no change

Purchasers buying between $500,000 and $1,000,000 will be required to ante up a little more towards the down payment:

1. If you buy for $600,000 you will need an additional $5,000

2. If you buy for $700,000 you will need an additional $10,000

3. If you buy for $800,000 you will need an additional $15,000

4. If you buy for $900,000 you will need an additional $20,000

5. If you buy for the maximum price allowed for an insured mortgage - $999,999 you will need an additional $25,000

A small point, but worth mentioning, is that for every $5,000 in additional down payment in the above scenarios, the borrowers will save about $195 in high ratio insurance premiums (including PST).

We know that the vast majority of homebuyers in the affected price range have at least 10% down and more frequently, 20% down (eliminating the need for high ratio insurance). Today’s first time buyers are more reliant than ever on “The Bank of Mom and Dad” particularly in the major cities with the highest prices. Even in situations where parents are not sitting on a big bank account, they often have houses that are fully paid, or have lots of equity which can be tapped into to help the children hit that magic 20% down payment – there are many benefits of this strategy – from the elimination of all high ratio insurance premiums to the availability of a 30 year amortization. Both of these examples will lower the monthly mortgage payments for the borrowers who are already probably stretching themselves a bit to get into the market.

Minister Morneau suggested that these changes would affect only about 1% of home buyers and this seems to play out when you really analyze the market. Prudent financial management of our housing and mortgage markets have so far prevented Canada from following the US and many other countries around the world into a real estate crisis that wiped out trillions of dollars in wealth for average citizens. It seems that this latest change is continuing that trend.

The importance of a healthy and stable real estate market cannot be stressed enough as virtually every aspect of our economy is somehow linked to housing. If there is a higher level of confidence in the market, more investors will be looking at real estate as a safe and prudent place for their hard earned dollars and more homeowners and potential homeowners will have the confidence to buy their first, second, or third home without the fear of a correction wiping out their net worth.

Click here for the government’s official news release.

Click here for the CTV News story on the policy change.

If you have any further questions about this policy change, or how it may affect you personally (should you be considering a move), feel free to reach out to us - we'd be more than happy to help!