As the time for the traditionally strong spring housing market approaches, the current state of Canadian real estate is on the minds of a lot of Canadians these days. It’s also a concern for Finance Canada, which has made a change to Canadian mortgage financing rules which will take effect on February 15, 2016, in time for the spring housing market.
For a number of reasons, Canada’s mortgage financing market never experienced the excesses which occurred in the United States, and which culminated in the mortgage and financial market meltdown in 2008-09. Nonetheless, the Canadian government was sufficiently concerned that it made a series of changes to the rules governing Canadian mortgage financing between 2008 and 2012. Those rules, all of which were aimed at ensuring that Canadians could actually afford the homes they wanted to buy, included the following:
- increasing the minimum down payment to 5%;
- decreasing the maximum amortization period to 25 years;
- limiting the maximum insurable house price to below $1 million;
- applying maximum debt service-to-income ratios; and
- applying a mortgage rate stress test for mortgages with terms of less than 5 years or variable rates.
The latest change in mortgage financing rules, announced in December 2015, is more targeted in nature. Specifically, the change affects only homes sold for more than $500,000. Since the average price of a home sold in Canada in October 2015 through the Multiple Listing Service was $453,000, this latest change will likely have the greatest impact in major metropolitan markets, particularly Toronto and Vancouver.
While the minimum down payment for purchasing a home in Canada is 5%, mortgage insurance is required where that down payment is less than 20% (The exception is homes purchased for $1 million or more, where the minimum down payment is 20%.) Such mortgage insurance is provided through a federal government agency, the Canada Mortgage and Housing Corporation, and backed by the federal government.
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That new rule provides that the minimum down payment for new insured mortgages will increase from 5% to 10%, but only for the portion of the house price above $500,000. In other words, the minimum down payment on the first $500,000 paid for a home remains 5%, or $25,000. Once the home price is over that threshold, the required down payment effectively rises with increases in the price of the home, as shown in the following chart released by the Department of Finance. Minimum Down Payment by Home Purchase Price: Existing and New Eligibility Rules |
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Home Purchase Price |
Existing Eligibility Rules |
Eligibility Rules Effective February 15, 2016 |
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Minimum Down Payment Percentage |
Minimum Down Payment Amount |
Minimum Down Payment Percentage |
Minimum Down Payment Amount |
|
|
$500,000 and below |
5% |
up to $25,000 |
5% |
up to $25,000 |
|
$600,000 |
5% |
$30,000 |
5.8 % |
$35,000 |
|
$700,000 |
5% |
$35,000 |
6.4 % |
$45,000 |
|
$800,000 |
5% |
$40,000 |
6.9 % |
$55,000 |
|
$900,000 |
5% |
$45,000 |
7.2 % |
$65,000 |
|
$999,999 |
5% |
$50,000 |
7.5 % |
$75,000 |
|
$1,000,000 and above |
20% |
$200,000 and up |
20% |
$200,000 and up |
The Department of Finance press release announcing the change can be found on the Finance website atwww.fin.gc.ca/n15/15-088-eng.asp, and that press release includes a link to a Backgrounder providing additional details of mortgage financing rules in Canada.
