New Down Payment Rules: Time to Exhale



Morneau

Finance Minister, Bill Morneau

If you’re trying to scratch together a down payment, or you sell mortgages for a living, today’s news could have been much, much worse.

The new down payment rules Finance Minister Bill Morneau announced this morning were as benign a policy change as one could hope for. This refers, of course, to the new minimum down payment requirement, which takes effect on February 15, 2016.

For properties between $500,000 and $1 million, folks getting an insured mortgage will now need to put more down—up to an additional 2.5% of the purchase price. In other words, 5% down will be required on the first $500,000, and 10% down will be required on the next $500,000.

For a $750,000 property, that means you’d have to cough up a 33% bigger down payment (compared to today), or another $12,500. The new rule doesn’t affect properties over $1 million because they don’t qualify for high-ratio mortgage insurance anyway.

As we reported last week, it seemed clear that some sort of down payment changes were on the way. But the speculation was that Ottawa would impose a flat 7-10% down payment for properties between $500,000 and $1 million. The actual rule announced today will affect far fewer borrowers than that (Benjamin Tal estimates about 4% of buyers overall). Many folks buying in that price range will find a way to scrape up an extra $5,000 or $25,000—from mom and dad, from borrowing their down payment, from selling other assets, etc.

Of course, buyers without other resources may have to save for another one to three years to buy a higher-priced home. But the deferral of these buyers will barely put a dent in home prices, at least in cities where high-value properties and multiple offers are the norm. (Properties over $500,000 in smaller metros will be more impacted.)

The changes I’d be more concerned about, as a consumer, are the higher securitization fees and larger capital requirements for lenders. These policies were announced in tandem with the down payment tweak.

Most lenders will absolutely pass down some or all of these costs to consumers. In fact, with the rate increases of late, some speculate they already have been.

I’ve been researching all day on what that means for mortgage pricing. The potential impact looks to be in the range of 3-8 basis points for the securitization fee change (depending on the lender), and another few basis points for OSFI’s additional capital requirements. Let’s call it a total 5-10 basis-point hike in mortgage rates over time.

CMHC says “the changes in guarantee fees are not expected to have a material impact on the level of mortgage rates, which remain at historically low levels.” And it’s right. But 5-10 basis points means a well-qualified ultra-low-risk borrower will cough up another $700 to $1,400 in interest over five years on a 5-year $300,000 mortgage. And who wants to pay that?

Then again, there’s a case to be made for building the war chests of CMHC and lenders, in the highly unlikely event that home prices crash land. So at least borrowers can take solace that their hard-earned interest payments are going to a “good” cause.

*******

Implementation details:

  • Qualified borrowers who get approved before February 15, 2016, can still buy with only 5% down. But lenders will likely set their application submission deadlines 1-2 weeks earlier.
  • People will still pay the same default insurance premiums, based on their overall loan-to-value (e.g., 3.60% of principal for a 5% to 9.99% down payment).
  • Check out these FAQs for more details.

On securitization:

  • CMHC’s intent was to raise CMB costs equally on small and large lenders alike. The increased cost amounts to roughly 40 bps for all lenders, says a source very familiar with the change.
  • The new guarantee fees reduce the attractiveness of securitizing via Canada Mortgage Bonds, relative to NHA MBS (where fees are also going up for lenders issuing over $7.5 billion worth of NHA MBS).
  • The MBS guarantee limit was raised from $80 billion to $105 billion for 2016, but it won’t create any more MBS funding or risk. The extra is just to support new requirements of the CMB program.
  • The government’s stated purpose of these fee hikes was to “encourage the development of private market funding alternatives by narrowing the funding cost difference between government-sponsored and private market funding sources.” Good luck with that. Insured mortgages, to which these fees apply, can’t be securitized outside of CMHC-sponsored channels. And no “private” CMHC-sponsored securitization markets exist (that we know of anyway).

Other effects:

  • First-time buyers were mostly spared by these new down payment regs. Their average purchase price is $293,000, well under the $500,000 threshold. 
  • Moreover, less than 1 in 10 first timers are buying $500,000+ properties to begin with.
  • Calgary could get hit the hardest (just what they need), because they have a much larger share of high-ratio mortgages, says Tal.

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Comments

  1. Comment avatar

    Dan Pultr    

    Great coverage Rob as always. Especially about the CMHC and OSFI changes, which were almost not covered today and more impact, in my opinion, on the overall picture.

     
  2. Comment avatar

    Appraiser    

    Once again Rob, excellent reportage. The most thorough and informative article available on the topic, by far. Kudos.

     
  3. Comment avatar

    Ron Butler    

    Thanks Rob, if you just listened to the government’s output , all you would hear would be about the increase in the CMB availability and none of the fee increases. Great analysis. It would appear that there is a clear trend to end or at least curtail the various government backed mechanisms that facilitated low mortgage interest rates for Canadians. In the face of an incredible run up in house prices in key regions and massive increases in household indebtedness, what else could we really expect? it will be interesting to see how this plays out.

    To me the key will be keeping competition alive in the mortgage space. Since the big banks control such a huge chunk of retail origination and an even bigger percentage of wholesale funding everyone including the public should be concerned that competitive mortgage origination funding sources continue to thrive.

     
  4. Comment avatar

    Ross Taylor    

    As usual, an excellent report. I concur that little attention was given elsewhere to the CMHC and OSFI changes. We can always count on CMT to give us all the facts in a well written, factually accurate and easy to follow fashion. Thanks Rob.

     
  5. Comment avatar

    Eliza Cranston    

    Thank you for sharing this updated information on down payments for mortgages. I’m not a mortgage broker, but I’m looking to get a mortgage and this information is helpful. I’ll talk to a broker about how this changes the process of getting a mortgage. Do you have any advice on how to find a broker that is up to date on all of this information?

     
  6. Comment avatar

    Robert McLister    

    Thanks a bunch Dan, Ron, Appraiser and Ross. It’s always encouraging to hear when folks find an insight or two in this stuff.

    Ron, you’re so right about the importance of keeping funding trends in the spotlight. Consumers often have no inkling about what’s going on in the capital markets, and how it directly affects their pocketbook.

    Cheers….
    -r.

     
  7. Comment avatar

    Michael Curry    

    I would agree that these changes will not have much of an impact. Perhaps they are just part of a long term plan.

     
  8. Comment avatar

    Mary Beltran    

    I am a first time buyer and I am buying the property with my sister-in-law. She is not a first time buyer. Are we still entitled to 5% down payment?

     
    1. CMT    

      Hi Mary,
      You can both still purchase with a 5% down payment as long a you qualify and the home is $500,000 or less.
      Cheers,
      Steve Huebl

       
      Comment avatar

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