DoF May Soon Mandate Higher Down Payments

Higher downpaymentsBy the end of January, the Department of Finance may recommend raising the minimum down payment to 10%. That’s what I’m hearing from a high-level lender source connected with the DoF, who declined to be identified.

Policy-makers are reportedly considering a graduated scale based on either the home value or mortgage amount—something like this:

  • $0 to $500,000 requires at least 5% down
  • $501,000 to $700,000 requires at least 7% down
  • Over $700,000 requires 10% down

These numbers are purely speculative, but such a methodology would do two things:

  1. Insulate first-time buyers (who typically have mortgages in the high $200k or low $300k range), and
  2. Shield smaller markets that haven’t seen the stratospheric home prices of Toronto and Vancouver.

Research from Mortgage Professionals Canada suggests up to 115,000 recent buyers might not be able to afford a 10% down payment, forcing them to defer purchases for potentially years. Studies like that probably factored into the DoF considering a graduated scale. Kudos to DoF policy-makers, by the way, if they do in fact avoid an across-the-board 10% down payment requirement and spare young buyers and weaker housing markets.

The DoF will presumably make its recommendation to Minister of Finance Bill Morneau. Morneau would then need to weigh the political and economic implications of this move. Our bet is that he’d side with senior policy-makers who are concerned about Ottawa’s exposure to the housing market, and put this into regulation sometime next year.

We’re currently awaiting comment from the Finance Department, but there’s likely not much they can say ahead of a formal public announcement. Sources say that if they do implement higher down payment rules, it would not require a public comment period and could be done relatively quickly.

  1. Interesting news.

    I just did a quick check of Toronto Real Estate Board stats year to date for 2015.

    There have been 25,147 sales of freehold dwellings and condos in the GTA between $501,000 – $700,000.

    There were 16,783 sales between $700,000 – $1M.

    Since properties over $1M require at least 20% down already, those sales were excluded.

    These new rules if implemented, could have a significant effect in the $700,000 – $1M sales range in the 416 area code, as they would double the down payment requirements for many homes that are not in the luxury category by any means. But that may very well be the point.

    1. Thanks for sharing those stats Appraiser. I suspect we’d also see somewhat of a bunching around the down payment tiers (e.g., more homes priced at $699k if the 10% down payment threshold is $700k).

  2. I’m missing the point on this policy. I believe this will have a negligible impact and is almost redundant in ‘qualifying buyers’. If you can afford a home in the $500,000-$1,000,000 range, you are already qualifying based on a provable and healthy income. If a buyer can qualify for a $650,000 home, they most likely can already afford the additional 2% that may be required to purchase. If a buyer is purchasing a $700,000+ home they are most likely not a first time buyer and therefore the down payment could easily be obtained from equity in the previous home.

    If a buyer is impacted, I believe buyers will just adapt and purchase a home in a lower price point. This will just shift demand toward more ‘affordable’ homes. It will have the opposite affect the DOF is looking for and increase demand for lower priced homes (raising the prices of those homes).

  3. I foresee an increase of foreclosures by eliminating such a large percentage of qualified buyers for houses in the higher price range.

    It would make more sense if it was tiered like our income tax brackets. If someone made an extra dollar, and it brought them into the next tax bracket only the extra dollar should be taxed at the higher tax bracket.

    There would be less of an impact on housing values if the required down payment was tiered in the same way. For example if a house was purchased for $800k, the first $500k requires a minimum of 5%, additional $200k requires 7%, and the remaining $100k requires 10%.

    This will open up more options for first time home buyers and will be less of a negative impact for sellers.

  4. When considering these potential rule changes, it seems clear that CMHC is the target entity. After all, we are talking about insured mortgages here and CMHC is still the dominant player in that market.

    Earlier this year, CMHC increased the premiums for buyers putting less than 10% down, a disincentive to do so to be sure. We also know now (based on the previous article) that it is unlikely that the banks will be required to pitch in with any sort of deductible should an insured mortgage suffer default.

    This leaves only the high-ratio home buyer with the requirement to put more skin in the game, which is not entirely unfair. I echo Rob’s compliments to the DoF for not proposing an across the board 10% DP requirement.

    I wouldn’t be too surprised if the bank of mom and dad become even more crucial for many home buyers moving forward, should these new measures come to pass.

    1. Have you tried to find a single family house in Toronto under $1 million? It is hard enough to get in the market as it is. Lowering the CMHC insurance limit is totally unjustified.

  5. Rob nails it, the graduated down payment system gives the federal government cover on the political side. Likely there is a two part concern here and they fold into each other. Property value escalation in the two key markets need to be tamped down and CMHC needs to continue to have its risk profile improved. Economists tell us that to tamp down markets you prune the roots, slow down entry level buyer and the whole thing will start to slow down. Slow the market down and CMHC will shrink on it’s own accord as I has for the last two years .

    That’s the plan but the bad part is always unintended consequences, interest rates have been edging up and the economy has been slowing down. The over reaching markets may be about to cool off all by themselves. So this new change may push them into reverse. Not the plan at all.

    The other issue is fairness, thousands and thousands of people who have been constantly scrimping and saving and forcing themselves to get to that 5% down payment point only have the rug pulled out from under them. I would lose my mind if happened to me.

    My two cents: PUT OFF ANY CHANGE. The problem may cure itself by the Spring with no interference at all.

    1. You are correct in that SFH cannot be purchased for under $1MM.

      CMHC’s original mandate was geared toward helping first-time buyers get into entry-level housing. SFH is not that. Dropping the limit will help still help this mandate while at the same time take the steam out of the higher end homes including SFH. Buyers’ and lenders’ behaviour will change.

      Not too long ago, CMHC had a regional mortgage cap that set a maximum dollar amount on the size of mortgage they would insure. Is it time to bring this back?

      If a buyer can afford a home that is priced significantly above the local average, they shouldn’t need what effectively amounts to a taxpayer-backed subsidy (CMHC ) to do so.

      1. If I want or need to buy a $900,000 house why shouldn’t I have access to the same government subsidies that benefit a lower income person? Our tax system is regressive enough already. The government should be helping ALL Canadians live better lives. If I need to spend more than you on a house and I have near zero default risk, it should be none of your business. How much a person pays for their home is a function of location, need and income, not just lifestyle. Socialistic policies than pander to lower and middle class Canadians are the biggest threat to our economy, job creation and EVERY taxpayer’s happiness.

        1. Ridiculous. NO ONE has near zero default risk, unless they are already sitting on a pile of assets. In which case, pony up and pay a larger down-payment.

          And if you are living in Canada, then you are benefiting from these ‘socialistic’ (is that even a word?) policies every day.

        2. I don’t know what your definition of “near” is but the Canadian Bankers Association shows arrears at 0.27%. That is about as “near zero” as you can get.

          Listen, I pay over 50 cents of every dollar I earn in taxes. I don’t get anywhere close to the value citizens should get for that degree of tax burden. Being able to buy a house with government backing is the least the government can do for low risk families like ours. As a taxpayer you should be happy the government insurance company CMHC is earning premiums on a mortgage it will never have to pay out on.

          PS. Yes, socialistic is a word. Look it up while you’re researching the facts.

  6. The Department of Finance’s official comment:

    · The Department does not comment or speculate on possible policy actions, or discuss what might be under consideration.

    · The Government continuously monitors the housing market and regularly reviews the merit of actions to support the long-term stability of Canada’s housing market and financial system.

    · Mortgage insurance rules have been adjusted in the past to protect Canadian families who hold wealth in their homes, and Canadian taxpayers, who support home ownership through government-backed mortgage insurance.

    1. Grooby – Well said.

      No Way – Back to my position of lower the CMCH cap. This is will bring down house prices. Your original thread , unless I misunderstood, you suggest one cannot buy a SFH for less than $1MM. My solution would help with that. What is the issue with my point of view?

      All – I think the CMCH does more harm than good and is the #1 reason why home prices are so inflated. As such, it could be abolished since it has resulted in a cavalier behavior by lenders, R/E agents etc. I do recognize however, it is cash cow for the government (general revenue) & there are folks that are in dire need, and on that basis, I think keeping it in place but lowering the ceiling is a good middle ground.

    2. Arrears is a backwards indicator, and does not predict future stress. Especially at a time when house prices are galloping way ahead of fundamentals in some markets.
      If you are talking about overall tax burden over and above income tax, then you’re still paying less in tax than many, many other countries. Canada has not nor ever will be a Libertarian paradise. If you can’t handle the tax burden, then perhaps re-location would be a better option.

      However, the funniest part of your rather lame response is that you are contradicting yourself in your own argument. If you want to pay LOWER taxes, then you as a tax-payer should want to have LESS exposure to defaults that CHMC would have to cover, because that is where YOUR tax dollars will go if (more likely when) things get hairy.
      Putting in the brackets noted in this article will have the effect of reducing risk for CHMC, and therefore YOU, the hard-done by tax payer who is apparently ‘rich’ but can’t afford a 10% downpayment.

      1. Prices are where they are. Changing the cap at this point won’t make a difference in cities with multiple bids on every property. The only things that would bring down home prices significantly are much higher rates, recession or much more supply. All a lower cap would do is keep families like mine out of the market while others buy.

        As for arrears, they are not a backwards indicator. They are a current indicator and a 0.26% rate of arrears proves that you are totally out to lunch when you say that no one has near zero default risk.

        Your tax argument is also weak. Who cares if some countries have slightly higher tax burdens. I don’t think Canadians in the top bracket should celebrate paying 60% of their income in taxes just because people in Belgium, Finland and Sweden pay 70%. No. We should fix the problems that make our taxes so high. Telling people to move if they don’t like the system is not a solution.

        Finally, you clearly have no concept of CMHC’s business. It has made billions and billions for taxpayers and made taxes lower for all Canadians. It has shown that even a U.S. style of housing crash would not make it insolvent.

        All of your claims about defaults and taxpayers losses are pure rhetoric with zero basis in fact. You can carry on the mindless debate with yourself as this will be my last post on the topic.

  7. They “May recommend”… this doesn’t mean anything… By January we “May be invaded” by alien also… doesn’t mean it will happen.

    This is just to push people to rush in buying now so that they can avoid the new rule that will never come. Good way to improve end of the year number

  8. Why not 5% up to 3 times the applicant income, and 10% over 3 times the income? If you want to buy a more expensive house you pay more… This CMHC program is to help people buy a house but it should not be an expensive house… More than 3 times the income of the applicant should come with a higher insurance.

  9. I don’t see this new rule having any effect in Vancouver where you can’t buy a house for under $1M and therefore these rules do not apply. First-time buyers in Vancouver can still buy a 1 br $450K condo with 5% down. I’m sure the banks will figure out a way to gift back the extra 2% to those buyers looking for 2 br condos in the $600K range. It may have a cooling effect on townhouses priced $700-$999K, since a first time home buyer in that category would have to seriously consider whether they want to put down $70-99K for a strata property. Or, you may see more desperate home buyers resorting to private lenders for down payments.

  10. TREB month end stats for November are out this morning. Another record month and already a new all-time annual record.

    “Greater Toronto Area REALTORS® reported 7,385 home sales through TREB’s MLS® System in November 2015 – up by 14 per cent compared to November 2014. This result also represented the best result on record for the month of November…“Not only did we see a record sales result for November, but with one month left to go in 2015, we have already set a new calendar year record for home sales in the TREB market area, eclipsing the previous record set in 2007.”

    “The MLS® Home Price Index (HPI) Composite Benchmark was up by 10.3 per cent year
    over year in November. The average selling price for all transactions was also up by a
    similar annual rate of 9.6 per cent to $632,685.”

  11. In our market, there is a strong need for 10% down allowed on properties over $1 million. With house prices starting at $1 million here, I am seeing young doctors and lawyers with income to support purchase of a home, but not enough money saved to purchase. Professionals necessary to our community are being priced out of the market.

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