Federal Government Raises High-Ratio Mortgage Down Payments
News agencies across the country are reporting on new nationwide mortgage protocol to affect many real estate consumers. The federal government has implemented a larger minimum down payment for high valued homes in Canada.
Currently the Canada Mortgage and Housing Corporation (CMHC) requires a down payment of 5% in order to qualify for their insurance protection. This CMHC is support is not required in all circumstances, but crucial for lenders to see when a mortgage value is worth upwards of 80% of the home’s value. As reported by the CBC:
“Banks are forbidden to provide “high-ratio” mortgages — when the amount being borrowed is more than 80 per cent of the home’s purchase price — without taking out insurance for it.”
The new CMHC prerequisite, handed down from the federal government, will require a new minimum down payment of 10% on homes worth over $500,000. However the additional cost will only apply to the amount that exceeds that total.
This means that buyers will still pay only 5% on the first $500,000, and then any excess amount above that will require the 10% down payment. The CBC report explains:
“Once the new rules are implemented in 2016, someone looking to buy a $750,000 home would need to have a minimum down payment of $50,000, which is what you get when you add five per cent of $500,000 and 10 per cent of the remaining $250,000.”
Finance Minister Bill Morneau has explained that the from a financial standpoint the move is an effort to “create an environment that protects the people from buying homes so they have sufficient equity”. Bank of Montreal Capital Markets has unpacked the issue and seems to agree that the impact will be for the greater good, according to senior economist Robert Kavcic,
“Rather than a blunt instrument to cool the market, this is a targeted measure designed to deter a very small segment of buyers from stretching into the market with a very low equity position”.
What will the local impact be from these measures? The EREB has addressed this issue from a local standpoint and comes out optimistically. The average sale price in the Edmonton census metropolitan area falls well below the $500,000 price point, currently at $438, 172. REALTORS® Association of Edmonton affirmed this sentiment.
“We are pleased that the tiered approach should have little effect on first time home buyers looking to get into the market. However, we will continue to watch the Edmonton market to see what effects this national change has locally.”
In 2015 there were 2,721 residential properties that sold for over $500,000. The new measures are cited to take effect February 15, 2016.
