Mortgage Down Payments: Different But Not So Bad

Good news – the new down payment rules taking effect on February 15, 2016 are a lot better than anticipated. The revised percentages affect properties costing between $500,000 – $1 million. Here’s how the new system will work:

• 5% down on the first $500,000
• 10% down on the remainder of the purchase price
• no change to the default insurance premiums (based on overall loan-to-value)
Down payments for properties over $1 million remain unchanged.

How many buyers will be affected? Industry experts feel far fewer than previous speculations, perhaps as low as 4%. In addition, there will be no difference for first-time buyers who traditionally purchase properties costing less than $500,000. The Calgary region could be disproportionately affected as their share of high-ratio mortgages is larger than in other areas.

Some buyers, however, will need to wait in order to save up the difference. These buyers will most likely not affect home prices, especially in high demand areas.

Along with changes to down payments were changes to lender securitization fees and capital requirements. These revisions will raise costs for lenders which will probably be passed down in part or in sum to the mortgage buyers.

Overall, the Canada Mortgage and Housing Corporation (CMHC) was looking to raise Canada Mortgage Bonds (CMB) costs across the board in order to “encourage the development of private market funding alternatives by narrowing the funding cost difference between government-sponsored and private market funding sources”. One effect is that National Housing Act Mortgage-Backed Securities (NHA MBS) have become a better securitizing option than CMB. Although the MBS guarantee limit has increased by $25 billion ($105 billion for 2016) this will not cause further MBS funding or risk. The higher limit is simply compliance with the new requirements.

What impact will these higher costs have on mortgage pricing? The estimates are that the securitization fee change will be between 3-8 basis points. The higher capital requirement will add several more basis points. In sum, experts foresee a 5-10 basis-point rise in mortgage prices as time goes on.

Despite these rises, CMHC feels that “the changes in guarantee fees are not expected to have a material impact on the level of mortgage rates, which remain at historically low levels.”

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