In a media announcement last Friday, the Federal Government announced new legislation for down payments on Canadian real estate purchases. The new mortgage rules apply to properties over $500,000 where the minimum down payment will be raised from 5% to 10% as of February 15, 2016.
The current 5% minimum will continue on properties under $500,000 and the current 20% down payment required on properties over $1M will also continue.
Those who already own a home will not be affected but if you do not port your mortgage when you move (i.e. if you break your current mortgage contract or allow it to lapse), you will be subject to the new rules.
According to Finance Minister Bill Morneau, these changes are meant to “reduce taxpayer exposure and support long-term stability” in Canada’s housing market. “This will impact one per cent or less of the market,” Morneau stated at the news conference.
Buying a Toronto Condo? How The New Mortgage Rules Affect You
The new down payment rules are graduated, proportionate to the amount owing on the home. The steps work similarly to Land Transfer Tax where you pay less on the first step or allowance, more once you surpass that limit.
Down payments will work as follows, using the example of a $650,000 property purchase:
5% required up to $500,000 = $25,000
10% on the additional $150,000 of sales price above this “limit” = $15,000
Total down payment needed on a $650,000 condo will be $40,000 as of mid February versus $32,500 following today’s rules.
Should I Buy Before February and Lock In at a Fixed Rate Mortgage?
If you’re ready to buy and have less than 10% down then it’s probably worth it for you to speed up that property search. Just don’t buy out of fear – make sure it’s the right condo for you.
In terms of rates, we chatted with James Harrison of mortgages.ca on what he would recommend to his clients right now. He tells us that:
“If you are on the fence but know you need to buy with 5% down – get in the market before Feb 15, 2016. Right now, we have rates as low as 2.24% (3yr fixed) locked for 120 days. But remember that the deal must be live and approved prior to Feb 15th.”
As a seller, now is a great time to list. We do expect an additional, mild surge in buyer interest over the next few months because of this announcement, over and above what’s already been an unusually busy November & December. Have a read of Monday’s post on tips for selling your condo.
What Are My Options If I Don’t Have 10% Down?
You really only have two viable options: one, buy a cheaper property under $500k – we think this change in legislation will continue to push more urbanites towards condo living versus single-family homes – and two, get a loan elsewhere to cover the additional amount.
With the second option, a loan from the bank of mom and dad is where most first-time buyers are having to go. If that’s not an option for you, there are other loan options but they are often high-interest and high-risk.
Remember, the whole point of this new legislation is to protect homeowners from getting themselves into dangerous levels of debt. So think hard before you take on any additional debt load.
Does This Mean That The Government Has Concerns Over The Health of The Real Estate Market?
There are always concerns; many grossly exaggerated aimed at fear-mongering but others are legitimate. And so measures to stimulate some level of moderation are a good thing.
But I certainly wouldn’t call this specific change an effort to cool down the market, as some people suggest – particularly given the continued discussion around potential negative interest rates (although this seems highly unlikely) that would spur people to spend and borrow more rather than save.
This seems to be more about protecting individual homeowners from leveraging themselves too high rather than moderating the market. Potential market disasters such as floods of stock due to foreign investors pulling out – which I don’t think is a major concern – aren’t going to be controlled by this one, small change.
But unfortunately, the impact of this decision is also likely to be small – some estimate as little as 5% or less of buyers will be impacted by this change. And so while we understand and even support the thinking behind this decision, I have to question if this is really more about political posturing than a serious effort to lead us towards greater market sustainability.
Still, many Canadians are over leveraged and any measure – no matter how small – to counteract this is likely worth acting on.
The most recent data by Statistics Canada shows that Canadians are carrying more debt than ever in our history. And so allowing the public to “self-regulate” is not working and home loans are the biggest source of debt increases as property prices continue to soar.
Doing nothing is a huge risk because a) mortgage and credit interest rates are so low, when they inevitably rise, some homeowners may lose their homes, and b) if there is a market correction at some point, people may end up owing more on their homes than the properties are worth.
On this latter point, markets are cyclical and when you’re buying and selling within the same market, it’s generally all relative. But if you’re nearing retirement and banking on your home value as your primary source of retirement funds or if you own as little as 5% in equity, then you could be in trouble down the road.
So, it’s a good thing in my opinion to see measures put in place to help limit extreme market behaviour, particularly as it won’t impact first-time home buyers (under $500k) who don’t need yet another impediment to getting a foot on the property ladder. I’m just not sure this is going to effect enough people to have any larger market impact.
If nothing else, hopefully it’ll help raise awareness of the dangers of high debt and get more buyers to think twice about wanting too much, too soon.
For second and third time buyers, it is really dangerous to jump from a small, starter condo to a home or luxury condo pushing the $1M mark or higher, and we’ve been seeing a lot of this over the last few years because of high ratio mortgages. We’ve talked before about being cautious with high ratio mortgages – how they’re a great option but only for particular clients and sets of circumstances. We do not recommend them outright.
If you can’t afford to carry your condo or house for six months if you lose your job or continue to hold onto your property if interest rates rise a few percentile points, then you probably shouldn’t upsize right now. And if you’re a first time buyer who can’t answer yes to these same questions, then you may not be a good candidate for buying versus renting.
In general, it’s usually a better investment and a wiser move to buy versus continuing to rent but if you’re leveraged so high than one change will cause your house of cards to tumble, then it’s not the right time for you to make the move to home ownership.
Condos Continue To Offer Abundant Choice. But Choose Wisely.
The new down payment rules aren’t likely to impact the market in any substantial way, save for a potential surge in activity prior to the February 15th deadline. Condos are and will continue to be in high demand before and after that date it’s just that people looking over $500k who don’t have a lot of savings may want to make the move to home ownership now. Just make sure not to panic – use our site to do your research and make a smart buy.
There are thousands of condo buildings in Toronto. And just like there are bad ones that are overpriced and shoddily constructed, there are also a heck of a lot of great ones that offer excellent value, quality builds and a stellar, urban lifestyle.
The point is that you really have to do your homework and consult a condo expert. Now, more than ever, it’s critical to make a smart purchase when considering the plethora of condos for sale in Toronto. Because it’s not just over-leveraging yourself with mortgage debt than can cause you to lose your shirt – overpaying and making the wrong condo purchase can cost you just as much if not more come re-sale when you realize you got a lemon and have to take a hit.
Choose wisely, friends.
James Harrison, President of mortgages.ca, is an award-winning mortgage professional and one of the top mortgage brokers in Canada. His VIP status with all major Canadian lenders means that he’s able to leverage the best terms and rates for his customers. You can learn more at mortgages.ca.
Lead image: Mortgage Down Payment © Karen Roach, shutterstock.