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Why Raising the Limit on CMHC-Insured Mortgages Could Spell Disaster for Canadian Housing

Jordan Lavin

As house prices continue to rise to levels beyond what anyone thought possible, questions loom about whether it’s time for the Liberal government to make good on their election promise to reduce the minimum down payment on homes between $1-million and $1.25-million from 20% down to approximately 8%.

On the surface, the change appears to be a good idea. Whereas the average home price in parts of the country now exceeds $1 million, it stands to reason that reducing the minimum down payment would enable a greater number of Canadians to afford the average home.

On closer inspection, however, such a policy change would be harmful to the housing market – and the Canadian economy at large – while benefitting only a select few home buyers. And if inflation continues rising as it has been, implementing this policy now could set our country up for the worst recession since 2008.

How is the minimum down payment set in Canada?

At the heart of the proposed change is the Canadian Mortgage and Housing Corporation (CMHC), a Crown corporation that provides federal funding for housing programs. One such program is CMHC insurance, which protects mortgage lenders in the event a borrower defaults. If a borrower can’t make their payments, the CMHC will pay the lender to make up for their loss.  

CMHC insurance helps make it safer for mortgage lenders to lend you money when they otherwise might not want to – for example if your down payment is less than 20%. With CMHC insurance, the minimum down payment is 5% of the first $500,000 and 10% of any additional amount. This allows you to potentially afford a much larger mortgage than you could without CMHC insurance.

The CMHC sets its rules at the direction of the Minister of Finance. As such, the Government of Canada can directly set the rules regarding the minimum down payment you need to make when purchasing a home.

What is the rationale behind the proposal to raise the cap on CMHC-insured mortgages?

One of the criteria to qualify for CMHC insurance is the purchase price of the home being insured. Currently, CMHC insurance is only available to you if you pay less than $1 million. According to Ratehub.ca’s mortgage affordability calculator, that means you can purchase a mortgage on a house for $999,999 with a 7.5% down payment, but if you pay $1 million, you need a 20% down payment.

Current rules

Purchase Price ($)

Minimum down payment (%)

Minimum down payment ($)

$500,000

5%

$25,000

$999,999

7.5%

$75,000

$1,000,000

20%

$200,000

This rule is starting to become a problem because the average house price is now $748,000 in Canada. In some markets, it’s much higher. In Ontario, the average house price is $998,000 and in British Columbia, it’s $1,040,000¹.

The proposal to raise the ceiling for CMHC insurance acknowledges this reality and aims to bring the average home back within the umbrella of what the CMHC will insure. If no other rules were affected by the change, you would be able to buy a house for $1,249,999 with an 8% down payment.

Proposed changes

Purchase Price ($)

Minimum down payment (%)

Minimum down payment ($)

$500,000

5%

$25,000

$1,000,000

7.5%

$75,000

$1,249,999

8%

$100,000

$1,250,000

20%

$250,000

 

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What would a higher cap on CMHC-insured mortgages mean for Canadians?

An increase to the cap on CMHC-insured mortgages will have an immediate effect that will provide more options for a small segment of home buyers at the cost of allowing the price of single-family housing to rapidly rise. Some home buyers will be able to afford a bigger mortgage. 

If you’re a home buyer with a down payment of at least $75,000, you’ll see your artificial spending limit raised from $1-million to $1.25-million (with $100,000 down). This may unlock a portion of the housing market you’ve previously been unable to access based solely on your savings, allowing you to enjoy more wiggle room at higher prices. 

If you’re working with a smaller down payment, or a much larger one over $250,000, your situation is less likely to be affected by this change.

Home prices over $750,000 will rise rapidly

Because borrowers will no longer have a hard limit of $1 million, homes currently in the $750,000 to $1 million range will quickly begin selling for more money. Homes currently in the $1 million to $1.25 million range are also likely to increase in value as a result of increased competition at that price point. And homes in the $1.25 million to $1.5 million range could see a boost in prices as a knock-on effect.

While the sudden influx of people qualifying for more expensive homes will create upward pressure on prices, homes under $750,000 and over $1.5 million are less likely to be affected. The market segment competing for those properties won’t see their situation change with these rules. The further from $1 million a home’s current value is, the more insulated it will be from the change.

Existing homeowners will have a wider gap to close when upsizing

Because homes currently in the $750,000 to $1.25 million range will rapidly increase in price, existing homeowners will have a harder time trading up. For example, if you currently own a condo worth around $400,000, it’s unlikely to go up in value because of this change. But the $800,000 semi-detached home you have your eye on could suddenly become worth $1 million.

Change looks unlikely until the inflation crisis is resolved

So far, the government hasn’t taken any action to make good on its promise. If any plans were in the works, they’ll likely be put on pause for at least a few months until the current trend of rapid inflation is better understood. That’s because inflation will lead to a rise in interest rates, and some homeowners could find themselves unable to afford their mortgage payments if rates go too high. While the root cause would differ, the symptom would be the same problem that caused the Great Recession of 2008-09.

If the government is wise, it will look for different ways of addressing this country’s housing affordability problem. Raising the cap on CMHC-insured mortgages would spur housing prices even higher while simultaneously enabling people to take on bigger mortgages in a time of rising interest rates. For all of our sakes, this is an election promise best left broken.

  

¹ https://www.crea.ca/housing-market-stats/national-price-map/

 

ALSO READ:

Should You Borrow For Your Down Payment?

How to Save for a House in Canada

7 Tips to Get Approved For a Mortgage

The Bank of Mom and Dad and Your Down Payment

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