The mortgage market in Canada has changed significantly since 2008.
Tighter rules have been brought in to ensure Canadian homebuyers are borrowing within their limits. The Federal government has seen what can happen when lending criteria is softened. It was the lax lending rules in the U.S. that led to the housing crisis in 2008 that then caused what we now know as the Great Recession.
Now the regulations are changing again. The most recent ones are aimed at higher priced homes in Canada. This means some homebuyers will have to save more to get into their dream home or condominium.
What’s new in 2016?
The Canada Mortgage and Housing Corporation (CMHC) now requires homeowners to have a 10 per cent down payment on the portion of any mortgage it insures over $500,000. The five per cent rule remains the same for the portion up to $500,000. For example, if you are buying a home worth $800,000, the minimum down payment you would need is $55,000. That is $25,000 for the first $500,000 value of the property and $30,000 for the last $300,000.
Announced in late 2015
When the announcement was made late last year Finance Minister Bill Morneau acknowledged how expensive the real estate market is in places like Toronto and Vancouver. He went on to say “we want to make sure we create an environment that protects the people buying homes so they have sufficient equity in their home.” But outside of those hot markets prices remain lower. The average sale price of a home in Canada is currently $454,342 (CREA December 2015), meaning the majority of homeowners buying will not be affected by these new rules.
Previously announced changes
When it comes to government-backed insured mortgages, this is the fourth time regulations have been tightened. Since 2008 the amortization period has been reduced from 40 years to 25 years. CMHC has also stopped insuring mortgages with less than 5 per cent down. This means homebuyers have to come up with at least that much to purchase their home. Banks have been instructed as well. New guidelines forbid them to offer home equity lines of credit totalling more than 80 per cent of the equity in your home.
Most of the rules target high priced homes. For example, a 20 per cent down payment is required on all homes purchased worth $1 million or more. As well, real estate investors can no longer take advantage of CMHC insurance and therefore also the required 20 per cent down to avoid it.
The good news is the average price for a condominium in a city like Toronto is roughly half compared to the price of a detached home. According to the Toronto Real Estate Board (TREB) the average condo sold in Toronto in Q3 2015 was $405,865. Compare that to the average price of a detached home in Toronto. In 2015 it was above $1 million. The changes means fewer people qualifying for insured mortgages in Canada. But, it also means many Canadians are looking for more financially reasonable options, like condos, for their family.
RUBINA AHMED-HAQ is the Finance Editor for HOMES Publishing. You can read her columns in Condo Life and Active Life. She’s also the finance expert on The Steven and Chris Show, regular contributor on CBC Radio, blogger at RateSupermarket.ca and has her own website AlwaysSaveMoney.ca.