As announced by Finance Minister Bill Morneau, in a press conference this morning, the Canadian government is making changes to the minimum downpayment in order to “encourage stability in the Canadian housing market.”
The federal government has just announced that they will be making changes to the minimum downpayment, that come into effect February 15th, 2016 for insured mortgages on properties between $500k and $1M. The new minimum downpayment for insured mortgages is 5% for the first $500k and 10% on the portion of the price above $500k.
So for example a property worth $700k would be 5% x $500k or $25k plus 10% x $200k or $20k for a total downpayment of $45k. Which is a $10k increase from only 5% as per the previous rules. The new downpayment rules apply to home buyers and do not impact existing mortgage holders.
“An increase in home equity protects home owners, it protects middle class Canadians.” Bill Morneau,
The purpose of these new guidelines is said to help cool the housing market in Canada, with particular attention being focused on the hotter markets of Vancouver and Toronto. The government is trying to address future vulnerabilities by targeting higher priced homes while minimizing the impact to first time home buyers in moderate housing markets. “Our response isn’t being made out of fear, it is being made to manage potential risk appropriately, this is measured action aimed at creating a stable and effective housing market”.
Mortgage default insurance is required on all home purchases where the downpayment is less than 20%, while default insurance is capped at $1M. According to Morneau the changes will only impact one percent or less of the market.
There is a silver lining to all of this. Although the mortgage insurance premiums will be based on the overall downpayment %, which is unfortunate, the extra money down will result in a small insurance savings ($360 on the extra $10K on a $700K property). The big savings will be on interest. The reduced mortgage balance could save a home purchasers $7,500 or more in reduced interest costs over the life of the mortgage.
Correction: It was initially thought that the lower insurance premiums would apply to the mortgage about $500K, but that was an error. The insurance premium will be based on the overall downpayment percentage.
If you have any questions about these changes and what they might mean to you, please contact me anytime!