The days of buying near-million-dollar homes with 5% down are officially over.
The new minimum equity rules for purchases between $500,000 and $1 million began Monday. The regs now require 5% down on the first $500,000 and 10% down for the remaining portion. As before, purchases of $1 million+ still require at least 20% down (if you want the best rates).
This news was all over the press today, as expected. One of the prominent questions was, how will young buyers fare?
Some, likethis broker, suggested that first-timers are the losers, and that the market “didn’t need” this rule. At the very least, that’s debatable.
For one thing, we know that less than 1 in 10 rookie buyers purchase homes over $500,000. Of the minority who do, we’d guesstimate that somewhere around half have down payments of at least 7.5% (the most a qualified borrower would need under the new rules). That’s based on the fact that almost 4 in 10 first-time buyers already put down 20% or more, says Mortgage Professionals Canada.
Of those who are shy the extra 0.1% to 2.5% of equity, many will tap their parents for more cash, some will use other debt sources and some will just defer their purchase 6-18 months or so, which may not be the worst decision as we watch how housing markets react to Canada’s economic challenges.
On the question of whether the change was needed, this rule wasn’t so much about slowing the housing market. No, policy-makers were more focused on limiting the federal government’s insured mortgage exposure. And, of all the ways they could have done that (increasing down payments to a flat 10%, shortening amortizations further, lowering debt ratio limits, etc), this was one of the most buyer- and industry-friendly moves they could have made. In a country where people earning $100,000 can’t buy a house in our biggest cities, and debt ratios keep on climbing, the Department of Finance did the right thing.