There’s been many mortgage rule changes over the last number of years as the Canadian housing market heats up, interest rates plummet and consumer and mortgage debt continues to rise.
Some of the recent changes over the years have been
- Reducing the maximum amortization period (how long it takes to pay off the mortgage in full) from 40 years down to 35 years, and then again from 35 years down to a maximum of 30 years.
- Tightened the borrowing ratios, limiting how much mortgage debt a home owner could borrow based on their income together with other non-mortgage debt to ensure borrowers weren’t over extended.
- Eliminating mortgage default insurance for any home over $1,000,000 making it mandatory for home owners in that price range to put a minimum of 20% down.
- And significantly limited the opportunity to borrow back more than 80% of the value of an home through a home equity loan. Or Home Equity Line Of Credit.
Just to name a few
All these changes have been done primarily to slow the housing markets in Canada’s two hottest cities, Toronto and Vancouver.
It’s a bit of a mixed bag of messages though. They want us to spend, just not on housing in Toronto and Vancouver it seems.
Since the economic down turn back in 2008 governments around the world, Canada included, lowered interest rates in an effort to make borrowing cheaper and to encourage spending which would hopefully stimulate the economy.
Well that message has been heard loud and clear in Canada.
Just last week it was announced that Canadians are now the number 1 debt holder among the G7 with 172% of disposable income.
So what does that mean really?
In short, it means that for every dollar of disposable (after tax) income that Canadian’s earn we owe on average $1.72 in debt.
That debt is comprised of car loans, credit card debt, student loans, lines of credit and mortgages. In fact mortgage debt makes up around 80% of that $1.72.
You’ve probably heard mention of Canadians using their homes “as ATM’s”.
Much of the rules changes are an effort to build in a sufficient amount of equity (the difference between the value of the home and the mortgage amount) to absorb any possible housing correction or down turn; be it due to a sudden increase in interest rates, significant down turn in the economy resulting in job loss or housing becoming generally unaffordable causing a significant and sudden sell off.
Regardless of what the possible cause might or could be, government officials are concerned with the heated markets in Toronto and Vancouver and so are constantly adding little measures to pull back ever so slightly on those markets.
Which brings me to the latest mortgage rule change and how it affects you.
Effective February 15th 2016 the new rules changes will effect how much is required as a down payment on homes over $500,000 and up to $999,999. Remember, homes over $1,000,000 require a minimum of 20% down.
Just to be clear, this new rule change only affects those who are putting less than 10% down on a home and then generally will only effect those who are planning on putting the minimum 5% down.
Depending on what you’re buying and where, your home may or may not be valued at more than $500,000. If it’s less than $500,000 nothing changes. The minimum is still 5%.
If you’re buying home over $500,000 then some small changes occur.
The rule changes are a tiered style, like income tax and land transfer tax.
For any amount under $500,000 the minimum is 5%. So, $25,000.
For any amount between $500,000 and $999,999 the minimum is 10% on that portion only.
So if you plan on purchasing a home for $600,000 then the minimum down payment would be $35,000. $500,000 x 5% = $25,000; $100,000 x 10% = $10,000
The 10% minimum down payment is only required on the $100,000 over $500,000.
In my discussions with home buyers there seems to be a consistent misunderstanding that if a home was over $500,000 that it automatically became a minimum 10% down payment for the whole amount; which as we see here is not the case.
These are just the latest changes in the mortgage rules in an attempt to cool the hottest markets and we’re sure they won’t be the last.
Though like all the last rule changes this rule change will soon become the “norm” and we’ll all wonder what it was like before we had to come up with a few thousand dollars more for a down payment.
We hope this cleared up any confusion or reaffirmed your understanding of the coming changes.
If you have questions about this change, past changes or any other real estate questions, we’re always happy to help.