Preparing for the new down payment requirement

Feb. 15, 2016 looms large on the mortgage landscape – that’s when the new down payment requirement kicks in for properties between $500,000 and $1 million.

Federal Finance Minister Bill Morneau in December announced changes to the rules for government-backed mortgage insurance, intended to contain risks in the housing market, reduce taxpayer exposure and support long-term stability.

Effective Feb. 15, the minimum down payment for new insured mortgages will increase from five to 10 per cent for the portion of the house price above $500,000. The five-per-cent minimum down payment for properties up to $500,000 remains unchanged.

What does this mean for first-time homebuyers?

Buying a house for less than $500,000?

  • The new down payment requirement will not affect you

Buying for between $500,000 and $1 million? You have four choices:

  • Buy before Feb. 15 to avoid the new requirement, to still be able to put down five per cent
  • Delay your purchase until you’ve saved the additional funds for the new, higher down payment
  • Somehow come up with the additional funds now, say, with help of the Bank of Mom and Dad, or
  • Buy a home that is priced at less than $500,000. Depending on the market you’re in, that could mean you’d then be looking at condo, instead of a lowrise home

For example, if you’re buying a property for $800,000, you would need to make a down payment of five per cent on the first $500,000 ($25,000) and 10 per cent on the remaining $300,000 ($30,000). This would be equal to a total down payment of $55,000, or 6.9 per cent of the total purchase price, or an increase of $15,000.

Buying for more than $1 million?

  • The changes will not affect you. You’ll need a down payment of 20 per cent, before or after the change in regulations on Feb. 15

Down payment table

Source: ratehub.ca


Regional markets to be impacted

While the new down payment requirement was intended primarily to slow the housing markets in Toronto and Vancouver – where average home prices are $630,876 and $947,334, respectively – the impact could be felt most elsewhere. CIBC Deputy Chief Economist Benjamin Tal says Calgary will be hit hardest, due to the large share of high-ratio mortgages. In this city, the new measures are estimated to impact about 10 per cent of new sales, while in Toronto the figure is five per cent; in Vancouver, just 2.5 per cent.

Spike in homebuying activity

Toronto-based Mortgage broker and wealth planner Calum Ross expects the new rules to cause a spike in activity before the deadline.

“Unexpected changes to the market that make access to capital more difficult historically have had a significant short-term impact, followed by an adjustment,” he told YPNextHome.

Expect market activity to go up substantially on homes priced between $500,000 and $1 million through until the deadline.

 

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