Last week, the Federal Government announced that they are increasing the minimum down payment that is required to purchase a Canadian home valued between $500,000 and $1 million. The main goal of this new policy is to cool down hot housing markets, specifically Toronto and Vancouver, which the Bank of Canada and other international agencies claim to be an economic risk.
This week, we’ll be focusing on how these new mortgage rules will affect you.
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How Have the Mortgage Rules Changed?
Beginning Feb. 15th 2016, the minimum down payment will increase for home purchases that are valued between $500,001 and $1 million. Previously, a minimum down payment of 5% was required. Now, a home’s purchase price is divided into two portions; that under $500,001 and that between $500,001-$1 million. These two portions then require different down payment amounts, being;
Under $500,001 ~ Requires 5% Down Payment
Between $500,001-$1 Million ~ Requires 10% Down Payment
For example, the minimum down payment on a house valued at $750,000 would be calculated as such; the down payment on the first $500,000 portion is $25,000 ($500,000 x 5%) and the remaining $250,000 is another $25,000 ($250,000 x 10%). So, the total minimum down payment is now $50,000 or 6.67%, while before it would have been $37,500.
Affected household will be required to find a way to acquire this difference in down payment. Either, homeowners can save extra or acquire the money from elsewhere (family, friends, etc). This obstacle is the biggest impact on prospective homeowners. The extra time required to acquire the extra down payment could also lead to the buyer paying a higher property price. The good news is that homeowners will save on CMHC fees and mortgage interest (probably around $500.00.)
Who Will be Affected?
These changes will mainly affect large municipal housing markets like Toronto and Vancouver. Yesterday, the Canadian Real Estate Association (CREA) stated that the average Canadian house costs $338,969 when Toronto and Vancouver prices are excluded. Therefore, these homes are mainly within the $500,000 down payment limit and will not be affected.
However, the CREA reports that the Toronto’s average home price is $632,685 and Vancouver’s is $930,652. The CREA also warns that these prices include all types of dwellings, e.g. condos, semi-detached, etc., therefore the policy change will likely affect homeowners to varying degrees depending on what type of dwelling they buy. So buyers in these markets will be impacted.
Will it really Change Much?
Most critics seem to believe that not much will change and I agree. CIBC estimates that the percentage of affected new home sales in Toronto will only be about 5% and Vancouver is even less at around 3%. Such a small proportion of buyers will not make much of an impact and it’s highly likely that they would be able to save or get the funds from elsewhere.
Likely, the biggest issues will arise from the confusion and conflict that occurs during the policy change. These transitional periods always have a way of causing stress, especially amongst inexperienced home buyers. There will also be a last moment mortgage rush just before the policy change deadline. Another possible source of stress is if individuals juggle around their extra money to fund the down payment and don’t properly plan for the other housing expenses, e.g., lawyer fees, land transfer taxes, CMHC charges, etc.
However, overall it doesn’t sound like policy change will have too large of an impact and homebuyers will adapt to the new changes pretty quickly.
That’s it for the new Mortgage Rules, thanks for spending your time here and please subscribe to our awesome newsletter. If you have any questions please contact me at 647-289-0012 or firstname.lastname@example.org.