Monday, December 14, 2015

New down payment rule change – will it affect you?

By Mark Kerzner, President TMG The Mortgage Group

What a difference a week makes.

The new Liberal government is making its voice heard loud and clear with respect to the Canadian housing market and its concerns about an overheated housing market in certain cities in Canada.

By increasing down payment requirements for properties greater than $500,000 the Minister of Finance, Bill Morneau took the position that, “The actions taken … prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions.”

While the industry knew changes were being considered, only a few would have bet on the speed with which they were delivered.

It is important to understand that increasing down payments has been talked about for many years and the results could have been much more severe.  I suppose, at its core, down payment minimums could simply have increased to 10% across the board. In presenting it this way the Minister has recognized geographic market differences. Please refer to the chart below for a simplified display of the extent of the change (showing that its maximum impact is increasing down payment to 7.5% for homes valued at $999,000, or $25,000)

Without a doubt the real estate sector, including the mortgage market, remain top- of-mind with our new finance minister. This change, along with some proposed changes from OSFI related to lender capital requirements, and CMHC changes related to guaranteed fees in the mortgage-backed securities market will surely lead to incremental costs for our mortgage funders.

These two additional changes seemed to have been timed to bring about a series of changes at the same time, which taken together, are designed to curtail a rising housing market. It is important that we are as aware of them as we are of the down payment increase.

When funding costs for our lender partners increase, they are likely to be passed along to consumers in the form of higher rates.  These increased direct costs to consumers, in the form of higher down payment requirements, combined with higher funding costs will certainly impact affordability on the margin. In doing so, the government is hoping it will create more balance in the market – perhaps by slowing it down in certain areas.

And while the intended ‘targets’ were likely Toronto and Vancouver, CIBC deputy chief economist, Benjamin Tal wrote a report that showed the unintended consequences may be felt more in cities such as Calgary, Victoria, Edmonton and Hamilton as those cities have a higher percentage of high ratio sales between $500,000 to $1M.  That said, overall impact is estimated to be less than 3.5% of the market.

For more than half a decade we have been working though times of increased regulation and oversight.  Some of those changes have brought about the increased use of secondary and private lenders for some, and increased down payment requirements for others. And while costs may have increased on the margin for some, ultra low interest rates along with a high degree of consumer confidence have buoyed housing markets in many markets across the country.

For years we have advocated government and policy makers to tread carefully around broad stroke changes to increase down payments. Given the government's intent to make this policy change I am pleased to see that it was done on the margin and took into consideration regional market realities.  The Department of Finance has drafted the following FAQ for more context.

While our initial reaction is always concern, I think it’s reasonable to estimate that these changes will not dampen the real estate markets to the point of collapse. In fact, we will continue to operate in a very robust and confident lending environment.

As we are assessing this latest change, it’s important to remember there are still a number of very important items on the radar as it relates to potential changes in mortgage regulations. These include foreign ownership in a broad sense and Canadian residents buying investment properties. Since both of these items already require at least 20% down payment, other levers may be evaluated as a means to influence the market.

Mortgage brokers save consumers money, whether or not they use a broker. That is because competition breeds responsiveness. Even though we are living through a period of heightened regulatory oversight, the broker channel continues to grow. The reason is that consumers need and value our experience and expertise to navigate the mortgage landscape, ultimately sourcing them the lender and product best suited for their financial need.

If you are a mortgage consumer reading this, I urge you to contact your mortgage broker today.

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