New mortgage rules went into effect Monday, Feb. 15, in Canada but many people may not be fully aware of the impact of the new changes.
Changes: New mortgage rules require 10% down on Canadian homes over $500K. Homes up to $500,000 still requires only a down payment of five per cent. However, for any portion above this threshold you now have to put 10% down payment. For example, if you are planning to buy an $800,000 home, you'll need to have a minimum down payment of $55,000, which calculates as follows:
5% of $500,000 = $25,000
10% of the remaining $300,000 = $30,000
Total: 25,000 + 30,000 = $55,000
This represent an increase of $15,000 in down payment that was required until Feb. 14 of this year.
Impact on individuals: Essentially, these rules affect homes valued at more than $500,000 and, as such, target red-hot real estate markets in Toronto and Vancouver where this is a common list price. It should also be remembered that a home purchased for more than $1 million still require a 20 per cent down payment.
Impact on Market: Although, the first time home buyers will feel the pinch of the new changes in mortgage rules, the overall market will have minimal impact. Finance Minister, Bill Morneau, himself recognized this fact when he said, at the time of making mortgage rules announcement in December, that he expected this change to affect one per cent or less of the real estate market.
History of Recent Changes: Canada tightened eligibility rules four times for new insurable loans between 2008 and 2012. These measures include raising the minimum down payment to five per cent and reducing the maximum amortization period to 25 years from 30.
National Mortgage Debt Worries: A recent study by C.D. Howe while recognizing that “the majority of Canadians have been responsible in their borrowing” observed that the “sustained low interest-rate environment” has caused a “significant minority” of Canadians to take on more mortgage debt than they can comfortably manage. According to this study, the number of a mortgage debt-to-disposable income ratio in excess of 500% skyrocketed from 3% in 1999 to 11% in 2012. Consequently, the study urged the federal government to alleviate the significant mortgage debt burden by considering policy actions.