Bill Morneau, the Finance Minister, announced today a significant change to CMHC-backed mortgages. As of February 15th, 2016, any home purchase over $500,000 up to $1,000,000 will now require a portion of the down payment to be 10%. Transactions less than $500,000 will continue to only require a 5% down payment and property purchases over $1,000,000 retain the minimum down payment of 20%.
For the next two months, Buyers can still put down a minimum of five per cent to qualify for Canada Mortgage and Housing Corporation insurance on properties under $1,000,000 — protection that lenders require under a federal mandate when providing a mortgage worth more than 80 per cent of the home's value (unless a Buyer instead sources private financing).
"We recognize that, specifically in the Toronto and Vancouver markets, we have seen house prices that have been elevated," Finance Minister Bill Morneau told reporters, "and we want to make sure we create an environment that protects the people buying homes so they have sufficient equity in their home." (CBC.ca)
Once the new rules are implemented, purchasers looking to buy a $750,000 home will need to have a minimum down payment of $50,000 (instead of $37,500), which is what you get when you add five per cent of $500,000 and 10 per cent of the remaining $250,000. To reiterate, the increased down payment only applies to the amount over $500,000.
Buyers have until February 15th, 2016 to secure a purchase if you want to buy a property in the 550k-$1mil range with only 5% down, and closing must be before July 1st, 2016. Also, take note you’ll still need to have your closing costs in cash in addition to your down payment.
The Important Facts:
• Effective February 15, 2016, properties over $500,000 will require a 10% minimum down payment.
• The increased down payment only applies to the amount above $500,000.
• Properties over $1 million still aren’t eligible for CMHC insurance and thus a 20% is required.
• The government estimates this should only impact about 1% of Canadians, although this estimate includes around 5% of Buyers in Toronto.
• The new rules apply to NEW purchases only, so if you are renewing a $Y2K mortgage and only have 5% equity, you won’t be affected.
• The goal of the change is to cool overheated markets (namely Toronto and Vancouver)
What does this mean?
First, we anticipate Toronto real estate will see increased intensity in the 500k-$1mil market segment as cash poor Buyers rush to secure something in the next 60 days with only five percent down. This is particularly beneficial if you’re a Seller with a property in the $500K to $1million price point, as there will be upward pressure for property in this snack bracket as Buyers scurry to lock something down.
After that flurry of activity, we may see the policy have its intended effect of cooling the housing market. Certainly it will as a market mechanism to help in the filtering of housing stock - and close the widening gap between the oscillation of the condominium and freehold housing markets in downtown Toronto. Buyers have been able to (and still can for a limited time) purchase a house for $999,999 and put just 5% - or $50,000 - down; the moment you cross $1,000,000 Buyers must put 20% down, which has been causing the freehold housing market under $1mil in Toronto to spike in prices as demand far outstrips supply. Now that the minimum down payment has been moderately increased, cash poor Buyers will automatically be funneled into less expensive properties- which means the more affordable condominium market. This isn't necessarily a bad thing, as it creates a larger pool of Buyers to support the exponentially larger supply of condominiums; in Toronto, at any given time there are ten times more condominiums for sale in the city core than houses. Increasing the minimum down payment may help mitigate the potential oversupply of condominiums we - and the federal government - collectively fear by channeling more first-time or financially-constrained Buyers into this housing type (although given the significant shortage of 2 and 3 bedroom condominiums in Toronto the family market simply may not buy).
However, as we see it, by economically directing Buyers into condominiums, it may slow down the filtering of housing up the property ladder initially but - as prices have stratospherically continued to rise - this is already our reality. Today, the gap in values between all housing types - 1, 2 and 3 bedroom condos and 2, 3 and 4 bedroom houses - are significant. The cost to get another bedroom is substantial even in our current downtown property market. This new policy isn't going to change this reality, but it will create a bridge between these two markets and ease the disharmony between them.
While increasing the minimum down payment is economically strategic for the well-being of our real estate market, the sad truth is that it will shut the door on many Buyers from ever owning a freehold dwelling in the city centre. Basically, if one doesn't get a freehold house in the downtown core soon, it will be economically prohibitive for most Torontonians, just like many other international centres.
Are you actively in the market? We offer more comprehensive insights on the state of the Toronto real estate market in our Winter 2015 Toronto Real Estate Forecast: Part One and in our Winter 2015 Toronto Real Estate Forecast: Part Two. Consider checking these - and consider reading our Dear Urbaneer series for more helpful information.
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