The Impact of New Mortgage Down Payment Rules

In an effort to combat the red hot housing markets in Toronto and Vancouver, the Canadian government announced new regulations and requirements for home buyers. The changes will be applied to lending rules related to residential mortgages, setting a new minimum down payment of at least 10 percent on for homes priced at and over $500,000.

For homes that cost less than half a million dollars, the prior five percent standard will remain. “We believe that by increasing the down payment . . . we will create a better buffer for people and make people more secure, and have the entire market be more stable,” Finance Minister Bill Morneau told reporters in Ottawa, explaining the change.

While Morneau did acknowledge that the new rule will only affect approximately one per cent of the total market, it will help cool the markets in Toronto and Vancouver, which many believe have been overpriced for close to a decade. Despite only one percent of national home sales being over $500,000, the average in Vancouver sits at six percent and Toronto’s is currently four percent.

“We’re looking at some housing market risks, some pockets of risks, that are important . . . in Toronto and Vancouver,” the minister told the Financial Post. “This measure carefully targets that to make ensure that the homeowners in those markets are protected.”

The new measure puts down payments for half a million dollar homes on the same track as homes valued at one million or more, where a 20 percent down payment is the standard.

Real estate experts believe the new efforts will be beneficial as a whole. “Marginal borrowers will be squeezed again and some buyers will have to defer their home purchase into the future, so they can save up that extra five percent,” says founder and independent mortgage broker Robert McLister. “So this potential change will slow the market. We just don’t know by how much.”

Analysts also believe the rules will boost condo sales for units that are under $500,000. “Those buyers with only five percent down payment saved will focus on homes under $500,000 and in the larger cities, such as Vancouver and Toronto, this segment is dominated by condos,” said independent mortgage broker Jake Abramowicz.

You may be asking, “Larry Weltman, how will the down payment requirement increase affect the rest of the country?”

It may be still too early to tell the long term effects in markets that aren’t as heavily saturated as those in Ontario and British Columbia. With that said, some speculate that the newly drafted rules will adversely affect the housing market across the country.

Earlier this month, the Canadian Real Estate Association (CREA) voiced their concerns that the new down payment requirements will stagnate the national real estate market. CREA is especially concerned about the market in Calgary and other parts of Alberta that have been heavily hit by layoffs and the falling price of crude oil.

“But, Larry Weltman, won’t the new rules just force more buyers into cheaper markets?”

Yes, this is one of the growing concerns associated with the increased down payment costs. The upward pressure for cheaper homes and the lack of demand for homes over $500,000 could create what is called a ‘fat middle’ when more buyers compete for mid-ranged priced homes and top end home sales slowdown. “This pressure may also increase the use of shadow lenders—private lenders that provide buyers with loans at much higher rates than traditional lenders,” Abramowicz said.

The new mortgage down payment rules will take effect February 15, 2016.