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The Home Ownership Rules Are Changing – Again…

December 11, 2015

Home Owners looking to purchase a home in the new year will find themselves in need of a larger down payment.

Earlier this December, new Finance Minister Bill Morneau announced a change to the existing down payment rules which currently require a minimum of 5% down payment. The new rules will come into effect on February 15th of next year and will only effect home buyers looking to purchase a home with a price between $500,000 and one million dollars.

For properties priced under $500,000, the minimum down payment required will remain at 5% – just as it is today. Potential first time home buyers and home buyers looking in less competitive home markets will largely remain unaffected. For properties priced between $500,000 and $999,999, home buyers will soon be required to have a total down payment as high as 7.5% of the purchase price. Homes $1 million and above do not qualify for mortgage insurance and will continue to require a 20% down payment.

Properties between $500,000 and $1 million will require a down payment of 10% for the amount over $500,000. The first $500,000 will require a 5% down payment.

So How Does It Work?

For a $800,000 property, the minimum down payment required will now be $55,000.00 – versus $40,000.00 under the current rules. This represents a 37.5% increase in the minimum down payment required and a total down payment of 6.87% on the $800,000.00 property.

Under the old down payment rules, the math was simple – 5% of $800,000 is $40,000. $40,000 being the minimum down payment a buyer could put down on the $800,000 home.

With the new rules, we calculate the first $500,000 of the down payment requirement at 5% – for a total of $25,000.

And then we calculate the remaining $300,000 at 10% for a total of $30,000.

The two sums add together to $55,000 – the new minimum down payment on our hypothetical $800,000 purchase.

CIBC economist, Benjamin Tal, estimates that this new rule change will affect approximately 4% of potential home buyers across Canada. In more competitive markets, such as Vancouver and Toronto, that number will most certainly be much higher. Buyers looking in the $500,000 to $999,999 price range may now delay their purchases to save the additional down payment, look to sell assets to cover the difference (perhaps liquidate their TFSAs or RRSPs) or possibly borrow the difference from elsewhere.

While it may be bad news to some – it sounds like good news overall. Some prospective home-owners may be forced to go back to the drawing board in order to save more money in order to bring a higher down payment to the table. Much to the chagrin of some, but otherwise healthier overall for everyone.