Why homeowners should cheer new down payment rules
A tougher standard for house down payments is good for both first-time buyers and baby boomers who define their wealth in terms of how much their houses have risen in value. A sustainable housing market is better than a hot housing market.
The newly announced down payment rule only applies to people who have a down payment of less than 20% and thus require mortgage default insurance. With the rule coming into play on February 15th, 2016, the minimum down payment will rise to 10% from the current 5% for the portion of a house price that exceeds $500,000.
To break this down, the minimum down payment for a $600,000 home would raise to $35,000 from $30,000. That's 5%, $30,000 on the first $500,000 and 10%, $5000 on the next $100,000 in price. That would be a blended down payment of 5.8%.
The impact of this new rule will be quite limited across the country, with only three cities in Canada having an average home price above $500,000, according to data on major cities provided by the Canadian Real Estate Association. Cities across Canada have premium homes that exceed the $500,000 price level, but they would appeal to buyers more likely to come up with higher down payments themselves, or through gifted funds from a family member.
Inevitably, some prospective home buyers will be knocked out of the market temporarily when it comes to purchasing a home, but economists believe it is a fair price for bringing some stability to a hot housing market (also fueled by record low mortgage rates) in which prices in most cities have risen far in excess of incomes.