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Pros and Cons of the New 10% Down Payment

If you are considering buying a house in Canada in 2016, you may need to put down more than you thought you would. As of February 15, 2016, a new rule will come into effect with regard to mortgages backed by the government.

If you’re buying a house for $500,000 or less, you will still only need a minimum 5% down payment. However, if you want a house over $500,000, you will have to put down 10% on the portion over $500,000. So here is a chart that shows you how it works:

 

Minimum Down Payment by Home Purchase Price: Existing vs New Rules

 

Existing Eligibility Rules

New Eligibility Rules Effective Feb.15,2016

Home Purchase Price

Minimum Down Payment % age

Minimum Down Payment Amount ($)

Minimum Down Payment % age

Minimum Down Payment Amount ($)

$500,000 and below

5.0%

Up to $25,000

5.0%

Up to $25,000

$600,000

5.0%

$30,000

5.8%

$35,000

$700,000

5.0%

$35,000

6.4%

$45,000

$800,000

5.0%

$40,000

6.9%

$55,000

$900,000

5.0%

$45,000

7.2%

$65,000

$999,999

5.0%

$50,000

7.5%

$75,000

$1,000,000 and above

20%

$200,000 and up

20%

$200,000 and up

According to Alyssa Richards, the CEO of RateHub.ca, the purpose of this is to try and put a damper on some of the more active housing markets in Vancouver and Toronto. Unfortunately, this is most likely to have an effect on people buying a home for the first time. An average home buyer in Toronto will now need about $6,600 more on hand to buy a house than they would have according to this rule, as the average home price in Toronto as of November 2015 was $632,685. In greater Vancouver, buyers would need an average down payment of $50,250, up from about $38,000, as a result of this rule, because that average price is $752,500.

So if you live in one of these pricier markets but aren’t in the closing phases of a mortgage right now, there are three choices that you have, assuming that you won’t have enough extra in savings to make the additional contribution to that down payment:

  • Set your sights on a less expensive home than what you had in mind
  • Put off the home purchase until you save the extra money

Angle you way into secondary funding, either from friends and relatives or from a private loan to augment the primary mortgage

This is just the latest in a series of attempts that CMHC has taken to bring more regulation to the housing market in Canada. They have increased their premiums on mortgage default insurance twice since the end of 2013, and they have upped the down payment for homes worth over $1 million to 20 percent. People who want to buy homes to use for rental income also have to put down 20 percent. However, those changes have failed to stop the rise of prices in these two booming housing markets.

Interested in pursuing your options for a home purchase in 2016? Talk to one of our mortgage specialists at Amansad Financial to get a personalized recommendation for your own situation.

Acceptable Sources For Your Down Payment

There are times when taking out a mortgage feels like the most thorough physical examination that you have ever had. However, unlike a trip to the doctor, the underwriting process can take weeks, as the bank keeps coming back to ask for just one more document. If all you need to buy a car is verification of your income, why is this so much more arduous?

There are several reasons. One is the Anti-Terrorism Act, which requires banks to verify that all funding that you use to purchase a home (including your down payment) comes from legal sources. In addition to terrorist activity, there are also organized crime groups in Canada that like to launder money.

Mortgage fraud is also a very real risk. Sometimes there are multi-million dollar fraud enterprises going on, and they would escape official notice if lenders did not chase down every single problem in a loan application. While the vast majority of people who apply for mortgages are not involved in a criminal enterprise, there are such nefarious things going on, and in terms of police investigations, court time and other public costs, there is a very real interest in keeping the rules in place.

There’s also the fact that lenders have to report to mortgage default insurers and their own shareholders – not to mention OSFI, which regulates them. If you take out a mortgage that you can’t pay and end up going into default because you can’t pay it, the bank will have to show that they undertook full due diligence before approving the loan.

Think about it this way. For a car, you might borrow $20,000 or even $50,000 to complete the purchase. For a home purchase, you might be borrowing 10 or even 20 times that much. If you were the lender, how much due diligence would you perform?

So let’s look at your down payment. The bank will want to see documentation that the money is sitting in an account with your name on it, and that the money has been there for at least 90 days (or at least they will want to see a 90-day transaction history). If you have any deposits into that account greater than $500 during that time, you’ll have to account for those.

Banks also want to see that you have some savings in addition to your down payment. You’ll have to pay at least 5 percent down, but banks also want to see that you have a plan in case something happens (job loss, illness or the like).

So what are the most commonly accepted down payment sources, and how do the banks verify them? Let’s take a look.

  1. Savings accounts. You’ll need a 90-day account history to verify these funds.
  2. TSFA. You’ll need a 90-day account history here as well.
  3. RSP – In addition to that 90-day history, you’ll also need that you redeemed the funds using RSP forms and that the funds went directly into your account.
  4. Loan – Some lenders will allow you to use borrowed money for your town payment. However, they will have to see the term loans to see if you can afford to pay both that note and the mortgage.
  5. Gift – This can come from an immediate family member, and you’ll need a signed gift letter indicating that the provider is not expecting repayment. You’ll also need an account statement from the person saying they gave you the gift in some cases, as well as proof that you deposited that gift into your account.
  6. Line of Credit / Credit Card – This is similar to #4 above. Can you repay both?
  7. Gifted Equity – If you’re buying a relative’s home, they are allowed to gift you the equity that they have in the home, and that can be your down payment.
  8. Asset Sale – You can sell something to fund your down payment, but you’ll also need to provide the bill of sale, a copy of that cheque, and proof that you deposited it into your account.
  9. Inheritance – You’ll need to provide the documents from the lawyer, along with proof of deposit into your account.

What about money you had in a box in your attic? Put it in a bank account for 90 days before applying to use it as a down payment. Otherwise, you’ll get a bad answer from your underwriter. These rules seem onerous but are there to protect the banks from fraudulent applications.

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Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
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