Down payment changes:
This past week has been a “take your medicine” moment – we knew that the government was making down payment changes and the industry was filled with speculation on the magnitude of the changes along with the potential negative effects on some already weakening local markets, however the final announcement was no where near as damaging as it could have been. There had been speculation that the government would increase the down payment from 5% of your purchase price up to $500 000 and then 7.5% between $500 000 and $750 000, followed by 10% down payment between $750 000 and $999 999. This could have doubled the down payment requirement for purchasers buying a new home. The good news is that the the final decision was scaled back to allow 5% down payment up to $500 000 of purchase price and then 10% down payment on the remaining amount of your purchase. It is also important to note that the new system of calculation applies to approvals that occur after February 15, 2016 so if you receive your mortgage and CMHC approval prior to this date you should not be affected.
*If you are purchasing a home for $700 000, your down payment would be 5% of $500 000 = $25 000 plus 10% of the remaining $200 000 amount = $20 000, for a total of $45 000 down payment required. The previous system would have permitted your purchase with $35 000 down payment, for an overall down payment increase of $10 000.
*The largest effect takes place if you purchase a home for $999 999, as the first 5% down payment amount = $25 000 and 10% of your remaining amount = 49 999 for a total down payment required of $74 999, or 7.5% of your purchase price. This is a total down payment increase of $24 999 from the previous system.
Other Government lending changes:
In addition to the down payment changes, the government also announces some potentially more troubling changes that could have a negative effect on all Canadians. The government announced larger capital requirements and higher securitization fees for the lenders, this means that it will cost the lenders more to do business. As you know, these costs are often passed on to the consumer and many experts are anticipating a rise in interest rates of between 0.05 to .01% to account for the increased cost of doing business. For a client with an average $300 000 mortgage, a rate increase in this range could increase the interest that you pay by approximately $1400 over your five year term.
In summary, the government down payment changes were much more positive than anticipated however as governments sometimes like to do, they gave with one hand (down payment) and took with the other in the form of increased costs to lenders that will ultimately be paid by the client. We are here to help you with your new home purchase or refinance, please always feel free to contact us directly and we would love to hear from you.