Bill Morneau Announces Rise in Downpayment Requirements for Canadian Home Buyers
To be honest, when I first heard this news the other night, my first reaction was one of trepidation.
I think a lot of people hear things in these announcements that create a certain sense of fear, like the number: 10%.
After hearing that number, I immediately thought they were going to increase the minimum downpayment requirement to 10%, but after a few seconds I was able to calm down and start to analyze the numbers.
How the Rise in Downpayment Amount Will Affect You in Alberta
Ok first off, if you are only putting down 5% on a $700,000 property, there’s a good chance that you might not be able to afford that property. Most of the buyer’s that I have seen in my career that can afford anything above the $500k range are putting down more than 10% down.
The numbers the government have given us on properties that are between $500,000 – $1,000,000 work like this:
- Homes below the $500,00 mark will see no changes, you will still only have to put down %5
- A Purchase Price at $500,000 and above look like this: 5% down on the 1st $500,000 and 10% down on the remaining balance of the sale price
So for a $600k purchase your downpayment requirement (as of February 15, 2016) will be: $35,000 instead of $30,000, this equates to a downpayment amount of 5.85% of the total purchase amount.
On a $700,000 purchase the downpayment would be: $45,000 instead of $35,000, this equates to again, 6.45% of the total purchase amount.
As you can see, the numbers are not staggering. In contrast, if they had actually done what I thought they had (remember how my mind went wild…thought 10% down total), the gap would be vastly different.
The Changes the Feds Have Made Since 2008
There have been a number of changes that the federal government has made to the rules governing mortgages and the purchase of real property.
In my opinion, most of these changes have helped the Canadian Real Estate Market and kept us from going down the same path the US consumer did between 2007-2008.
Some of the changes that you might remember include:
- Reduction in Amortization period from 40 years to 25 years with 5% down
- Reducing the amount you can borrow from 95% to 80% LTV
- Requiring a minimum of 5% downpayment (In 2007 you could get a 0 Down Mortgage)
- Minimum 20% down on non-owner occupied homes
In the US, to many people were using their homes as a credit line to purchase other homes, boats, new vehicles etc. They wracked up a ton of consumer debt and when the market tanked, and the amount they owed was way more than what the property was worth, you saw a lot of people go into bankruptcy and eventually lose their homes.
The Final Word
If you are looking at getting into the market, and the bank says you can borrow $500k or $600k, it doesn’t mean that you have to.
We are shifting into a different market in Calgary where you have more choice and opportunity to enter the market at price points where these changes will not affect you.
At the end of the day, if you are putting 5% down on a $700,000 home, you might want to rethink that strategy. One of our experienced agents can help with that.