One of the biggest hurdles for home ownership is coming up with the down payment. In high-priced markets like Vancouver, a 20% down payment isn’t always a given, and many buyers will put less money down and pay for obligatory mortgage default insurance in order to jump into the market sooner. This insurance has allowed people to buy sooner, as prices climbed and interest rates remained steady.
The minimum down payment on homes less than $500,000 is 5%, which reduced from 10% in 1998 by the federal government, in an effort to boost the economy. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. The maximum value for buying a home covered by mortgage insurance is $1 million (which means if you are buying a home for $1 million or more, you must put down at least 20% and possibly more depending on the lender’s “high-end” home formula.
The insurance rate depends on how much you put down – a 5% down payment will result in a 2.75% premium, a 10% down payment will have a 2% premium, and 15% down payment will cost you 1.75% in insurance premiums. While the amount seems small, it can add tens of thousands of dollars to your mortgage payments. And remember, even if you make a large lump sum after the mortgage closes that gives you 20% equity, you don’t get the premium back!
So, what’s happening now?
- – CMHC and the Bank of Canada have both made several announcements regarding their concern for the level of debt in Canadian households.
- – TD and Royal Bank have announced rate increases (with more lenders possibly following suit).
- – CMHC has stated that a sharp increase in interest rates could trigger more than $1 billion in losses to the insurer ($2 billion if Canada experienced a “U.S.-style” housing correction).
These developments have now culminated in the recent announcement by Evan Siddall, chief executive of CMHC, that they may look at raising the minimum down payment for homeowners with mortgages covered by default insurance. That means that if you are planning on buying a house with only the minimum 5%, you may need to revaluate your plan.
Interest rate hikes and increasing minimum down payments can throw a wrench in your mortgage plans. Call me today to discuss how we can get your plan back on track, or how I can get develop a plan for you if you don’t have one yet. Remember, my services are completely free, and can save you thousands of dollars!