A minority of housing commentators have pushed for bigger down payments ever since the credit crisis. Bankruptcy advisor Douglas Hoyes is adding another voice to that chorus.

According to his firm’s data, out of 2,030 insolvent homeowners he analyzed:

• 9 in 10 had less than 20% equity
• 7 in 10 had less than 10% equity
• 2 in 3 had no equity at all

That’s enough to make him champion a 10% minimum down payment rule.

But is it enough to justify one?

“Hold a mortgage above that [90% LTV] threshold and you are at significant risk of filing for insolvency,” writes Hoyes.

When we read statements like that the question immediately becomes, how material is the risk? And, as usual, the data speak louder than words. 

About 1 in 200 CMHC-insured mortgages go in arrears, based on transactional homeowner insurance data. That number is higher if you look solely at 95% loan-to-value borrowers. But it’s not dramatically higher (insurers don’t publish the numbers but their premiums are a fair proxy of the added risk). Insurance premiums for 95% LTV borrowers are 31% higher than for 90% LTV borrowers.

But even those in bankruptcy find ways to keep paying their mortgage. That’s why mandating 10% down would probably only reduce bankruptcy rates by 1-2 percentage points, Hoyes tells CMT. That would save maybe 2,500 bankruptcies a year based on 2013 data.

To put that in perspective, we’re talking about only 0.05% of Canada’s 5.6 million mortgagors, or 1 in 2,200 households. “Arrears tend to be very low for someone in a bankruptcy situation with a house,” Hoyes notes.

So while 10% down payments might save only a small number from financial devastation, such a requirement would have profound effects on the almost 7 in 10 insured borrowers who rely on financing above 90% LTV. Without question, doubling the minimum down payments could dramatically slow Canada’s housing market, a market comprised of up to 55% first-time buyers. Those are exactly the buyers who rely on LTV’s north of 90%.

Putting aside the untold market repercussions of a 10% down rule, Hoyes conveys an important moral in his story. He notes that, for insolvent mortgagors, “mortgage payments take up a substantially larger portion of their income, leaving them little room to support living and other expenses.”

“You go buy a house and then what do you do? Well, I buy furniture, renos, landscaping. So my unsecured debt is going up as a result of buying that house.” It’s no surprise that the average insolvent homeowner owes $73,000 in unsecured debt at time of bankruptcy.

“It’s not just the mortgage that gets you into trouble. It’s all the stuff that you buy for your house on credit that gets you into trouble.” And this danger is even more pronounced for high-ratio insured borrowers.

“If you’re buying the maximum house you can afford with the minimum down payment, you’re increasing your own personal risk,” he warns. Financial setbacks can leave you with no options at 90% loan-to-value, due to mortgage penalties, potentially lower home prices and the closing costs of selling your property.

Delinquent mortgagors then often turn to credit to make their mortgage payments. And that, Hoyes adds, is unsustainable.

Sidebar: The latest study by Hoyes, Michalos & Associates Inc. found that insolvent homeowners carried an average mortgage of $208,083. Their total debt-to-household income ratio was 585%.

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Rob McLister, CMT

Last modified: September 17, 2014