With the announcement the federal government is boosting the minimum down payment for higher-priced homes in Canada, it will likely be the Toronto and Vancouver housing markets that will be most affected by the change, says Toronto real estate lawyer Peter Neilson.
Starting in February 2016, the Canada Mortgage and Housing Corporation will require a 10 per cent down payment on the portion of any mortgage it insures over $500,000, the CBC reports. The current five per cent rule will remain the same for the portion up to $500,000.
“Homebuyers are currently insisted to put down a minimum of five per cent to qualify for CMHC insurance — protection that lenders insist on when providing a mortgage worth more than 80 per cent of the home's value,” the article states.
Neilson, partner with Shibley Righton LLP whose practice includes the acquisition, sale, leasing and financing of all kinds of real estate, says the cutoff point of $500,000 appears deliberate. In hot markets like Toronto and Vancouver, even modest homes and condominiums can easily surpass the $500,000 threshold.
“Certainly in Toronto and the GTA, even a first-time buyer financing that amount is not unusual,” he tells AdvocateDaily.com.
Neilson says he sees the logic behind the new policy. “By only putting down five per cent, you would be vulnerable to any changes in the market — a market may not seem to be changing yet. However, certainly interest rates are going to go up at some point.”
The more you put down, the more equity you have, he says.
“If your house price stalls and interest rates go up and you have to refinance, you may suddenly be looking at paying significantly higher monthly payments. A higher down payment gives you a bit of caution against that.”
Neilson is curious to see what the long-term impact of the policy shift will be.
“The interesting question is will this have a significant effect on the market? Will it mean people will have to moderate their price range and aim a bit lower or will they just be more cautious and save a bit longer? Who knows? It’s too early to tell if this boost will cool the market because there are so many other factors involved.”