Reminder: Down Payment Rules Change on February 15th, 2016

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Keep in mind that the minimum down payment for new insured mortgages will increase for homes above $500,000 on February 15th. Check out the new down payment requirements by home price below or contact me for more information!

On December 11th, 2015, Finance Minister Bill Morneau announced upcoming changes to the rules for government-backed mortgage insurance to contain risks in the housing market, reduce taxpayer exposure and support long-term stability. Effective February 15^th, 2016, the federal government is implementing these significant changes to mortgage rules. The new regulations will increase the minimum down payment to buy a home that costs more than $500,000. The new rule will increase the minimum down payment from 5 percent to 10 percent for the portion of the home over $500,000.

Finance Minister Bill Morneau announced the changes to mortgage rules for homes above $500,000. Homeowners must put down 10 percent on any portion of the price over $500,000. At first, homeowners may be alarmed, thinking, ‘oh wow, I have to double the down payment’. That’s not quite the case. It is 10 percent for only the additional amount over $500,000.

For example, let’s say you bought a $600,000 home in Toronto. On the first $500,000 it is 5 percent down. On the $100,000 taking it to $600,000, you must have 10 percent down. As a result, your down payment goes from 30,000 to 35,000.

Mortgages

Stabilizing the market

So what is the reason for new home-owners having put down a larger amount on homes over $500,000? Why this rule change?

The housing market has been going strong, but there has been a distortion. There have been high movement in Toronto as well as Vancouver. This new change is an effort to slow things down in a way.

Finance Minister Bill Morneau said the changes will help stabilize the housing market. It is a move to cool off the red-hot housing market in some large cities in this country. This change has the potential to slow down the real estate markets in Vancouver, Toronto, to name a couple, without slowing down the whole market.

Morneau also stated that “by targeting higher priced properties, we’ll minimize the impact on many first-time home buyers about regional housing markets where activity is more moderate. While eliminating risk and tax payer exposure to the elevated housing markets in Vancouver and in Toronto”.

Morneau said that the government doesn’t fear the market but they want to cool the market in some larger Canadian cities and create an environment that protects them. This decision comes just after the C.D. Howe Institute came out with findings which were taken into consideration for this decision. The findings showed that those who are first time home buyers are typically younger, have a lower income and are very vulnerable. They don’t have a cushion of emergency funds. What if they lose their job and what if rates start to go higher?

This is a way for Morneau to say, ‘okay, we’re going to try to slow things down but we’re not going to bring the housing market to a screeching halt.’ To give you a better idea, we’re talking about maybe in total 3.9% of new home buyers, 5% impacted in Toronto because it’s as hot as it is. 2.5% in Vancouver and surprisingly, because of the number of high risk mortgages, Calgary, Alberta is also going to be impacted. They don’t need any more things going on there to slow down their housing market. What Morneau is saying is that ‘these are mortgages that have to be insured by CMHC and we fund CMHC so were on the hook if people default’.

New mortgage changes

The new rules won’t impact current home owners

This is a graduated approach to increasing the down payment requirement proportionally to the cost of a home. Existing homeowners will not be affected by the changes.

You may be wondering if you’re a first time home buyer planning on purchasing in 2016, are you going to feel punished by this or is this bad medicine for your own good in the long run? The new changes will definitely make them pause and question whether or not they are ready for the financial investment.

The change is effective as of February 15th, which is right around the corner. It may cause new home buyers to reflect on whether or not they should be getting into this and if they are taking on too much. The bottom line is that it is never necessarily a bad thing to have to put a little more money down because you end up paying less in interest and more money stays in your pocket over the long haul.