Prepare for a 10% minimum down payment

Will stiffer rules help cool the red-hot Toronto and Vancouver housing markets?



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The federal Department of Finance is seriously considering weighing in on Canada’s housing market by raising the minimum down payment on a home purchase from 5% to up to 10%. Their recommendation to the Minister of Finance could come as early as January 2016.

According to founder and independent mortgage broker Robert McLister, government policy-makers are considering a graduated minimum down payment threshold based on either the home value or the mortgage amount. Homes/mortgages under $500,000 would only require a 5% down payment, while those between $500,000 and $700,000 would require 7% down and anything over $700,000 would require 10% down.

Apparently, the rationale for this new graduated scale is two-fold:

→ Tougher lending requirements should help cool the housing market, particularly in red-hot Toronto and Vancouver.
→ It would also help minimize the exposure taxpayers have to insured mortgage default losses.

Currently, if a person buys a home with less than 20% down the lender is legally required to take out mortgage default loan insurance. This insurance reimburses the lender the full mortgage amount should a person default on the loan. The money used to reimburse the lender comes from taxpayer coffers.

While this sounds like a win-win—and there are certainly positive elements to this tiered down payment system—there may also be a few unintended consequences.

Pro: Cool the country’s two hottest housing markets

We know from past experience that any regulatory change has a real impact on the housing market. For instance, prior restrictions to mortgage rules had the government withdraw coverage (ie: availability of mortgage loan insurance) to homes that cost $1 million or more. The government also tightened amortization lengths—removing the 40, 35 and 30 year options. (Home owners that can put down 20% or more still have the longer amortization options but typically pay a one-time fee and may be subject to a higher mortgage rate.) The impact of these restrictions can still be felt almost five years later, explains Will Dunning, chief economist for Mortgage Professionals Canada (formerly known as Canadian Association of Accredited Mortgage Professionals).

These new changes, then, will certainly have an impact. “Marginal borrowers will be squeezed again and some buyers will have to defer their home purchase into the future, so they can save up that extra 5%,” explains McLister.“So this potential change will slow the market. We just don’t know by how much.”

Pro: Help Canada’s condo market

One market segment that could get a bit of a boost is the condo sector. “Those buyers with only 5% down payment saved will focus on homes under $500,000 and in the larger cities, such as Vancouver and Toronto, these segment is dominated by condos,” explains independent mortgage broker Jake Abramowicz.

Con: Hurt the rest of Canada’s housing market

Still, the rest of Canada’s housing market may not fare well with this speculative changes to the minimum down payment. “Prices are way up in Toronto and Vancouver, but sales and prices in the rest of the country are faltering,” explains Abramowicz, who describes the nation’s real estate sector as a “two-speed housing market.”

Canada's two-speed housing market

While B.C. and Ontario continue to experience a surge in housing prices and new builds, pricing and builds in the rest of Canada has either stagnated or dropped. Calgary, Regina, Saskatoon, Montreal, Quebec City and Halifax all reported a drop in housing prices, year-over-year, by September 30, 2015.

House prices in Canada


Con: Other market factors not addressed

Abramowicz is concerned that changes to mortgage down payments won’t actually address the lack of inventory both Toronto and Vancouver. “Despite escalating prices, sales are up in these two cities as are the number of listings,” says Abramowicz, “but inventory is very low.”

It’s a fear shared by Dunning. “Any policy change that restricts housing purchases won’t actually address the biggest problem facing Toronto and Vancouver: a lack of supply.”

Other problems that won’t be addressed by potential changes to down payment minimums include: ongoing access to cheap debt (due to historically low interest rates) and the impact of cash-investors.

Con: Could create a fat middle-market

Finally, by creating a tiered down payment system, the government could artificially increase demand for homes valued under $500,000. Buyers who don’t have 10% saved up for home over $500,000 may opt to pursue a purchase in the lowest down payment tier (homes that are $500,000 or less). An increased number of buyers for these homes will create increased demand and this could, eventually, lead to price increases.

At the same time, homes worth $500,000 or more may see a decreased number of potential buyers; this could reduce the demand for these homes, which could lead to decreased prices for this segment of the market.

The upward pressure for cheaper homes and the lack of demand for homes over $500,000 could create a fat middle: more buyers competing for some over-valued and some under-valued homes in the mid-range market. It’s possible.

This pressure may also increase the use of shadow lenders—private lenders that provide buyers with loans at much higher rates than traditional lenders. As such, Abramowicz strongly advises borrowers to seek guidance from a mortgage professional and to do their own budget analysis and stress-testing.

As for the Finance Department? As expected, they had no real comment on the issue stating: “The Department does not comment or speculate on possible policy actions or discuss what might be under consideration.” They go on to state: “The Government continuously monitors the housing market and regularly reviews the merit of actions to support the long-term stability of Canada’s housing market and financial system. Mortgage insurance rules have been adjusted in the past to protect Canadian families who hold wealth in their homes, and Canadian taxpayers, who support home ownership through government-backed mortgage insurance.”

I guess we’ll need to wait for a formal public announcement.
Read more from Romana King at Home Owner on Facebook »

Correction: The Department of Finance will make a recommendation to the Minister of Finance as early as January 2016. The original article, published Dec. 4 stated that the Department of Finance would announce any proposed down payment in January 2016. 

15 comments on “Prepare for a 10% minimum down payment

  1. That’s not fair for first time home buyers. Why doesn’t the government levy taxes for foreign purchasers of homes, they’re the ones who are responsible for the sky high prices of homes in Toronto and Vancouver. Why are they punishing Canadians? Especially us the millennials as if we don’t have it hard enough. Not everyone of us can rely on their parents for help on a down payment!


    • Don’t worry leslie, the upcoming US interest rate hikes starting this month will fix the out of control cost of ownership in Toronto and Vancouver. As will the low oil prices, job less, job insecurity and increasing taxes. People don’t buy houses when they are afraid. Just be a bit more patient and embrace renting for the time being and invest the monies you save by renting into a diversified global portfolio. It will work out for you in the end and you will be better off for not following the herd.


      • Upcoming wha?? Our govts north and south of these here borders are in a bad situation. They got hooked on zero percent interest rates as did we schmucks who voted them into power! Sadly your Dec. ’15 real estate affordability forecast was dead wrong! Rising up up UP! I think it will cont. in these two city markets until 2018 and then — maybe a slight Pop! But in no way a 40% correction — that’s dreaming for the unfortunates who didn’t get in early enough to purchase.


    • It’s called fair trade, you can’t make someone pay more simply because they are from a different country. Also all they propose is an increase of down payment on homes worth more than $500,000. Sorry but if you can afford a million dollar home then you can afford 10% down, if you can only afford 5% down then you are clearly living beyond your means and should be buying a cheaper house. There is absolutely nothing unfair about it.


    • If you can’t afford 20% down you can’t afford the house. You are better of renting, saving/investing what you can and buy the house when you can afford it.


  2. ‘The money used to reimburse the lender comes from taxpayer coffers’. I think Moneysense needs to check this statement. The money to reimburse the lender comes from the insurance premiums paid by the buyers. The government does guarantee any potential shortfall. It would be interesting to see what has been taken in in premiums and what has been paid out to lenders.


    • Good point. The money to reimburse does come from premiums collected. If, however, there is a shortfall the government will jump in and make up that shortfall. Those rescue dollars are collected through our taxes.


  3. Poorly written. As a writer if your going to attempt to state some facts then atleast attempt to verify them. Default insurance does not cover the value of the entire home, it covers the difference between the down payment and 20%, further houses in Canada if foreclosed must be sold at market value! So the insurance rarely pays out, it is also NOT funded by taxpayers. CMHC is a crown corporation funded by people purchasing their product, there are also private companies that offer the same service. At no time does the government put tax payers money into CMHC, in fact it works like most other corporations the government gets revenue from CMHC.


    • Hi Carl. Thanks for the comment. You’re right. The default insurance covers short fall and if a borrower defaults and the home does not sell (as in there is market down turn, no one is buying real estate and foreclosure numbers start to rise dramatically, as we saw in the U.S.) then the entire amount in arrears must be paid out to the bank/lender. If there are enough foreclosures and there is a shortfall (as in the premiums collected by CMHC or Genworth) cannot cover all the losses than the government must kick in and cover this shortfall. The money the government uses to cover this shortfall is collected through taxes. The insurance portion is not covered by taxpayers. The shortfall is covered by taxpayers. The worry (both in the government and among analysts) is that houses with rapidly rising prices now may mean huge foreclosure numbers in the future (should the market turn dramatically) and this would deplete the premiums collected for such an event and leave the government (and hence the taxpayers) no the hook.


  4. A Chinese Canadian real estate agent in Greater Vancouver a close friend to my wife told her that in 2016, a minimum of 5,000 Chinese millionaires, billionaires will come to the Greater Vancouver area to ‘park’ their money in real estate, mostly single detached home and high-end condos. Reason for the influx is the Chinese economy slowing down, and the return on buying Canadian properties far outweigh any return they would get in China or anywhere else for that matter. Real estate falls under provincial jurisdiction, yet the BC Provincial government led by Honourable Christy Clark still does not want to regulate the market to fix this situation. Canadians are forced to buy further and further out in the suburbs. In Surrey (46 km from Vancouver) the prices of detached homes in some neighborhood have increased beyond the reach of many Canadian families. An acquaintance of mine who runs a successful business just upgraded from living in a condo in New Westminster (21 km from Vancouver) to an affordable detached house in Chilliwack (102 km from Vancouver). It is sad to see that some political leaders are so entrenched in their philosophy that they won’t deviate from it even if it is to assure the betterment of our own citizens, their electors.


  5. The price of housing and inventory in “Vancouver” is not reflective of the majority of this province. A national policy driven by what is actually an anomaly driven largely by a fickle foreign customer base is dangerous and generally unfair. There are other ways to manage the anomaly in Vancouver and Toronto that don’t adversely affect the rest of Canadians.


  6. Where is this law? – “Currently, if a person buys a home with less than 20% down the lender is legally required to take out mortgage default loan insurance.”. Somehow I don’t think this is correct. I think lenders have the option of taking out insurance but didn’t think it was legally required.


    • Hi Jeff. It is a regulation. Banks are required (it’s not optional) to take out mortgage insurance on any loan with less than 20% down. It is optional for the banks to pass on the cost of the premium…but all do. It is also optional for banks to purchase mortgage default insurance if the loan is acquired using 20% or more down. Banks typically do not pass on the cost of mortgage default insurance if you put down more than 20% because mortgages are a competitive business. If one bank started charging this fee…they wouldn’t get that business, because the borrower could turn around and find half a dozen banks ready to give them the mortgage without passing on the loan premium.


  7. I can understand the larger down payments, but I think the fairest way is to go to 6% @$600,000, 7% @ 7 &. 8% @ 8 , 9% @ 9etc. I think it has the same built in unfairness as the homeowners grant, where if your home is valued under $i,000,000 you get the grant over $1 mil you dont, I think everyone should get a grant up to $1 mil and nothing after. Ron


  8. don’t understand how the feds think that by putting a barrier for those in the middle would help local Canadians. All they’re doing is just temporarily stopping the bleeding or rather more so to protect a potential bail out. It would be be interesting to see what happens when all the China money invested here leaves. But perhaps it may not because the Asians love Vancouver and would rather flip houses here and then take their money elsewhere. This is analogous to how foreigners who take advatage of the higher education US colleges and never give back to the US but rather take the resources back to their home land. I’ve heard from some investors that Vancouver has traditionally been known as “pump and dump”, how interesting that I am seeing this concept applied now being a Canadian born Chinese since the late 70s. Income taxes are already high in BC and now the government wants us to save more money for the over inflated real estate market? And by the way, just in case of any snarkiness, I’m not in the under $1 mill market but I sympathize for those who are and am dealing with the even crazier asian invasian. The inflated market isn’t a result of only higher borrowing, it’s the straight cash deals without subjects scooping up property by the storm. It’s the power of the China and US currency that allows for them to pay on average 30 to 40% over assessed values. Just my 2 cents….


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