In early December, the Federal Government announced that it was tightening the country’s lending rules and raising the minimum down payment from 5% to 10% for the portion of a home purchase above $500,000.1 The new down payment rule—which takes effect February 15, 2016—will have a big impact on some first-time home buyers across the country.
Minimum Down Payment Raised to Cool Housing Market
The Canadian mortgage rule landscape has changed significantly over the last 10 years. It wasn’t that long ago that you could purchase a home with zero down and a mortgage with a 35-year amortization period.
All that changed when the Federal Government stepped in to tighten mortgage lending rules in an effort to avoid a housing crisis like the one that gutted the U.S. market. In 2008, the amortization period was reduced to 35 years from 40 years and the minimum down payment for new government-backed mortgages was raised to 5%.2
Despite these (and other) efforts, record-low interest rates and strong demand from buyers have helped the Canadian housing market stay red hot, especially in Ontario and British Columbia. The average sale price for a home across the country is expected to increase by 8.4% year over year to $442,600. In 2016, the average Canadian sale price is projected to increase by a more manageable 1.4% to $448,700.
To help get a handle on the strong housing market, the Federal Government introduced a new mortgage rule —one that will make it a lot more difficult for first-time homebuyers to get onto the property ladder. On February 15, 2016, the minimum down payment to qualify for Canadian Mortgage and Housing Corporation (CMHC) insurance will rise from 5% to 10%.
Where first-time homebuyers currently need to just come up with a 5% down payment on a home, come February, they will need to put 5% down on the first $500,000 and 10% on the next $500,000.
For example, if you wanted to buy a home right now that was valued at $750,000, your down payment would be $37,500. Under the new rules, a homeowner will need to come up with $50,000: 5% of $500,000 and 10% of the remaining $250,000.
The new down payment rule does not apply to homes over $1.0 million because they do not qualify for mortgage insurance. The new down payment rule also does not affect those looking to buy a home listed under $500,000. For those property buyers, the 5% down payment rule is still in place.
What the New Down Payment Rule Means for First-Time Homebuyers
Doubling the down payment on a home from 5% to 10% means it will be a little more difficult to come up with the extra money needed to buy a home. Others may have to save up for a while longer.
Keep in mind that the national average price for a home sold at the end of 2015 is expected to be around $442,600 and $448,700 in 2016,3 which is still well under the $500,000 threshold for the new 10% down payment rule. This is great news for first-time homebuyers.
Those national averages include upward sales activity in Toronto and Vancouver. If you take these two markets out of the equation, the national average is approximately $339,000.4
Case in point: the average price of a detached home in Toronto was $1.01 million in November. In Ottawa, just a few hours north east of Toronto, the average sale price of a residential-class property was $380,761. Most of the properties sold in the Ottawa area fall in the $300,000 to $400,000 price range, followed by the $200,000 to $300,000 range.5
What all of this means is that the new down payment rules will only affect a small portion of the market, namely first-time homebuyers in hot markets like Toronto, Vancouver, and Hamilton.
But in most cities across the country, the average home price is under $500,000. And for those first-time homebuyers, the minimum down payment is still just 55.
Canadalend.com—Getting Ottawa Homebuyers the Best Products and Rates
Whether you’re a first-time homebuyer looking to buy a home under or over $500,000, the licensed, independent agents at Canadalend.com will help you get a mortgage with the best rates and terms .
As the country’s leading private mortgage professionals , Canadalend.com has access to hundreds of mortgage lenders who specialize in both residential and commercial loans. We’ll help you find a lender who is best suited to meet both your financial and lifestyle needs.
To see what kind of mortgage loan you qualify for, contact Canadalend.com today . Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.
“Bill Morneau tightens mortgage rules on homes over $500K,” cbc.ca, December 11, 2015; http://www.cbc.ca/news/politics/morneau-home-ownership-finance-1.3360610.
Freeman, S. “Mortgage rule changes more severe than industry wanted,” Investment Executive web site, January 17, 2011; http://www.investmentexecutive.com/-/news-56505.
“CREA Updates Resale Housing Forecast,” The Canadian Real Estate Association, December 15, 2015; http://www.crea.ca/stats/quarterly-forecasts.
Brooks, S., “Ottawa’s New Down Payment Rules Aren’t Necessarily A Bad Thing,” Huffington Post Business, December 16, 2015; http://www.huffingtonpost.ca/samantha-brookes/down-payment-rules_b_8817960.html.
“Mild weather and post-election enthusiasm spurs on homebuyers,” Ottawa Real Estate Board, December 3, 2015; http://www1.ottawarealestate.org/home/NewsInformation/LatestNewsRelease.aspx.