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Ottawa Changing Mortgage Rules

The federal government is tightening mortgage rules, which are clearly aimed at slowing down the Toronto and Vancouver housing markets.

As of Feb. 15, there will be additional down payment requirements for homes that sell for between $500,000 and $1 million. The current 5% minimum down payment for the first $500,000 of the house price will be maintained, while requiring a 10% minimum down payment for the portion of the house price in excess of $500,000.

For example, someone buying a $700,000 property would be required to make a down payment of 5% on the first $500,000 ($25,000) and 10% on the remaining $200,000 ($20,000). That would equal a total minimum down payment of $45,000, or 6.4% per cent of the total purchase price.

The 5% minimum down payment for properties up to $500,000 remains unchanged and Canadians who already have a mortgage won’t be affected.

“The actions taken today prudently address emerging vulnerabilities in certain housing markets while not overburdening other regions,” Finance Minister Bill Morneau said on Friday.

According to the Canadian Real Estate Association, the average home price is $947,334 in Vancouver, $630,876 in Toronto, and $454,976 in Canada. And the Toronto Real Estate Board says the percentage of homes sold in Toronto above $500,000 between January and November of 2015 was 53.4%.

The changes will mainly affect millennials and first-time home buyers, especially those who are trying to buy a house close to downtown in Toronto and Vancouver.

The new down payment structure means that buyers purchasing in the $500,000 to $1 million range — who had planned to put the 5% minimum down — will have to do one of the following:

  • Come up with the additional down payment through a gift from family
  • Delay their purchase, and rent a little longer, until they have saved the additional funds themselves
  • Decrease their purchase price down below $500,000, which likely means purchasing a condo instead of a house
  • Purchase before the new rule comes into effect Feb. 15

The changes are the latest in a series of moves since 2008 that have attempted to slow down the market in our low-interest rate environment, including:

  • Increasing the minimum down payment from 0% to 5%
  • Increasing the minimum down payment on investment properties from 0% to 20%
  • Decreasing the maximum amortization for insured (high ratio) mortgages to 25 years
  • Decreasing the maximum amortization for uninsured (conventional) mortgage to 30 years
  • Setting a higher qualifying rate (than the stated rate of the mortgage) for variable rate mortgages, and terms of less than five years
  • Eliminating equity-based lending programs
  • Increasing mortgage default insurance premiums by about 15% in 2014
  • Increasing mortgage loan insurance premiums for homebuyers with less than a 10% down payment will by 15% in 2015

The housing market in major urban centres has continued its strong growth, despite these changes over the past six years.

The changes announced Friday will apply to new mortgage loans where a mortgage insurance application is received on Feb. 15, 2016 or later.

Flickr: pnwra