What impact would 10% minimum have on Canadians?

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One big bank has suggested raising the minimum down payment for mortgages to 10%. Brokers weigh in.

“Cranking up the requirements on homes priced under $500,000 would have zero impact on average home prices, zero impact on the market as a whole, but a devastating impact on a few hundred, perhaps even a few thousand families and individuals across the country who cannot access gifted funds, who have scrimped and saved to get to 5% - only to have the goalposts moved … and to what end?” Dustan Woodhouse, a broker with Dominion Lending Centres, Canadian Mortgage Experts, said. “To protect those dastardly savers from driving up prices of sub 500K properties?”

The comment came in response to National Bank of Canada Chief Executive Officer Louis Vachon’s claim that 10% minimum mortgage requirements could help cool spiking housing prices.

“For the longest time, we had minimum 10 percent cash down and we had 25-year maximum amortization and that worked very well," Vachon, told Bloomberg. “I think over a period of time that’s where we need to gravitate back to."

However, Woodhouse argues such measures would cool a part of the market that doesn’t need it. That being targeted by first-time buyers.

“[First-time buyers] are the ones who want their hands around the lowest rung on the homeownership ladder,” Woodhouse told MortgageBrokerNews.ca, in reference to homes costing less than $500,000. “And they want to raise that ladder?”

Some may argue Vachon, a big bank executive, is out-of-touch with just how difficult it is for some to break into the market as a first-time buyer. That extra 10% could delay homeownership for years for certain people.

However, not all brokers believe raising the minimum to 10% would have a major impact.

“Most clients that come up with 5% can come up with 10%,” Iain MacFadyen, a broker with Dominion Lending Centres in British Columbia told MortgageBrokerNews.ca.

However, MacFadyen did acknowledge that first-time buyers would be the most affected.
  • Ralph Cramdown on 2016-06-03 9:46:40 AM

    So one mortgage broker says this would have no impact on the market as a whole, but would cool the bottom end... inplying that it would increase the heat in the rest of the market? Even though move-up buyers would presumably have less of a downpayment if the buyers of their entry level homes had fewer resources.

    And the other one says that most clients are completely indifferent to downpayment requirements, with a variation on "there's always a bit more gas in the tank."

  • Peter on 2016-06-03 9:53:56 AM

    I dread to see what will happen in the next few years when the mortgage rates start to head back up to the historical average of 6 to 7%?

    Most Canadian homeowners are already leveraged up to their nostrils with huge mortgages at 2.5 to 3%.

  • Paul Therien on 2016-06-03 11:11:08 AM

    When I started in the industry the minimum down payment was 10% with a maximum 25 year amortization. CMHC only insured loans where the LTV was greater than 75% - not 80%. Interest rates were 18% and the maximum GDS as 32% and TDS 40% - no exceptions. Many lenders actually calculated the GDS and TDS based on net income – NOT gross income. You know what… People were still buying homes.

    The difference between now and then? The biggest change is the % of income that is required to service a mortgage. While property values have been increasing at unprecedented rates income levels have not been following the same pattern. In many parts of the country the opposite has been happening and incomes have actually been declining. Companies profits are increasing steadily and that increased wealth is not being shared with the people that make the machine “go” and that is why movements like “Occupy” have happened (albeit with no resulting change).

    Currently with the dramatic increases in property values a 5% down payment is not as significant an issue as some may believe. With some areas seeing a value increase annually in excess of 10% the owner has reasonable equity in the home in a short period of time.

    I believe what is truly at issue here should not be the % of down payment, but rather the average homeowners ability to effectively service the mortgage. When I was a newbie one of the qualifying factors used was always the # of dependents the borrower had. There was a cost associated for each and this cost ($200 per month for one, $300 for two, and $350 for three) was included in the serviceability calculations for any debt incurred. Today, few, if any lenders take this into consideration when looking at extending credit. Children are expensive, and they are much more expensive than they were 25 years ago. I can remember a study done in 1996 that outlined the true cost of one child from birth to the age of 21. The average was $500,000 or roughly $1900 per month (this included costs for shelter, education – including university, food, extra-curricular activities, etc).

    These costs of living have a direct impact on the long term sustainability of an individual’s economic situation and yet we no longer consider much of this when looking at the extension of any type of credit, including mortgages.

    In 2004 the government started to loosen lending criteria to such an extent that it drove the property industry into a frenzy. This bolstered our economy and allowed a greater number of Canadians to purchase homes. (It was also around this time that to rules regarding foreign ownership became looser). The result is an industry that has an unprecedented percentage of our national GDP and an economy that is heavily reliant on the housing sector.

    With interest rates sitting as low as they have there is an entire generation of homeowners who have no concept of anything approaching a rate of 5%, never mind 8% or more. Government, in an effort to bolster the economy and protect borrowers, have kept interest rates artificially low. But how long can they sustain this before inflation starts to become a serious issue? Our only saving grace thus far has been worldwide economic conditions that have allowed us to suppress inflation.

    Borrowers who are maxing out their capacity at today’s interest rates are seeing equity build in their homes, and that is great. What is not so great is the actual percentage of tangible income being used to service their mortgage debt. 32% GDS is actually 43% of their net income and TDS is hovering at 57% - what happens when rates increase? Most people who are maxed out in their capacity do not have the ability to weather an increase of as little as 1%. Personal savings are at an all-time low with the majority of working Canadians not even having 2 months savings. In fact only 4% of Canadian homeowners have the means to survive any economic challenges to their household incomes. The major issue is because household incomes are not increasing at rates that can compensate for higher inflation or cost of borrowing and as a result savings are diminished. What savings they do have, usually goes into the purchase of the home. The government knows this and they are doing what they can to keep thing ‘copacetic’.

    Increasing the down payment to 10% is not going to solve this and there are no easy solutions. Canada has been experiencing what most consider a global anomaly in that our economy has survived where others around the world have collapsed in totality and 8 years later have still not recovered. The number one question I am asked by people: “Paul, when is it all going to come tumbling down?” My answer… “I don’t know, but what I do know is that 15+ years of consistent growth is not sustainable. I don’t believe it will collapse, but I do believe that the wave we are riding will at some point reach the shore, and when it does we will see economic changes. We will either coast to shore or we will get crushed. It’s complicated and even the greatest economic minds of our time have no idea what will happen.”

    I believe that we are at the precipice of great social and economic change in Canada, and that Mortgage Brokers have an unprecedented opportunity to educate consumers on the benefits of making wise financial choices surrounding home ownership and long term planning. The best security we can give is through education.

  • Amber on 2016-06-03 11:37:47 AM

    For many first time home buyers 5% is already an extreme amount to save. On a $440,000 home that is $22,000. To say someone who could save $22,000 could easily come up with $44,000 is not taking into account what that person may have gone through to scrape together then first $22,000 or how long they waited to get it. We already have many parents having to gift the down payment. This is a generation that is already known for carrying debt into their retirement. Do we really want to make debt the precedent so that the next generation can get into their own homes?

  • Kevin R. on 2016-06-03 11:40:19 AM

    Paul has hit the nail on the head. The issue ins not equity in the home, it is the serviceability of the mortgage. If government wants to truly cool the housing market... increase mortgage rates by 1% or more.

    The consumer most cares about how much money is coming out of their pocket every month, not the total cost of the purchase. Cars are the perfect example. If someone had to come up with 100 grand to buy a BMW there would be hardly any of them on the road, but a lease payment of $600 per month... now that I can do.

    The flip side... those suppressed interest rates are the only reason that Canada was one of a very few countries that has not experienced serious economic decline. Think it will last forever? You must also believe that unicorns are real.

  • Sarah on 2016-06-03 11:54:03 AM

    I agree with Kevin and Paul. The issue here is today and will be the serviceability of debt when rates increase. We have been keeping our heads firmly in the sands and pretty much ignoring the future that is in front of us. I remember when rates hit 21% for mortgages, prior to that for years everyone kept saying that it was impossible for rates to ever go that high... guess what, those people were wrong.

    Most of the mortgage brokers in Canada have been in the industry for less than 15 years, and as good as you may be... you have no idea about anything other than an economy that has been riding high. You have never experienced a true recession and for the majority - you have never seen rates over 6%.

    At some point rates will need to increase to suppress inflation and the world that has been viewed through rose coloured glasses will suddenly become stark. I would wager that most mortgage brokers, when that happens, will be blindsided because they are so focused on getting the commission for the deal and less concerned about making sure that their clients are well aware of the need to budget not just for today, but for the future.

  • Ronnie Kartman on 2016-06-03 5:31:56 PM

    I don't see anyone here mentioning about the perilous effect that foreign purchases have made (and continue to make) on the housing market and the future of the economy.

    With such a high percentage of foreign investors purchasing (mostly non-mortgaged) properties in Toronto, Vancouver, and other major cities, it is no wonder that the values have increased by over %15 this year alone.

    Although we are not a mortgage brokerage, we have been in the mortgage referral and renovation facilitation business since 1988, and I agree with Sarah: Those of you (most of you) who have only been in the industry for less than 15-20 years are totally clueless as to what a real recession in the industry can be.

    People today whine when the houses don't go up by over 5% for the year. In 1989-1991, much of the condo market had increased substantially and quickly due to the government's lax rules regarding foreign investment.

    Much of such investment actually helped the economy at the time, bringing mass construction jobs and satellite industries to Ontario.

    Unfortunately, the locals (working Canadians who have a real-life stake in where they live and work) are being priced right out of the housing market, where only foreign investors or inherited homes command the day.

    By waiting too long before even minimally taxing this type of ownership, the government has placed us all in jeopardy. The feds know that even a hint of any change in the rules could and would start an avalanche of such foreign sellers (who will have no stake or interest in what would happen to the city or the country as a result).

    On the other hand, if things continue as they are, house prices will continue to quickly skyrocket until hitting an abrupt ceiling (like an out-of-control elevator going up) and the market will fall.

    Increasing the down payment may be one of several logical approaches, but who gains and who suffers? The increase in down payments would mostly affect first-time homebuyers, who would surely be shut out of the marketplace.

    If the down payment must be raised, why double it? Why not increase it incrementally?

    Why not also doing something about the foreign investment rules?

    Why not put in place even a modicum of rules for foreign ownership (maybe force these investors to hold properties for a minimum of 5 years, for example, rather than allow them to speculate to this extent, where they will be able to take the money and run, leaving us "working stiffs" to suffer in the aftermath of what has the potential of becoming an extremely violent "downsizing"?

  • Ronnie Kartman on 2016-06-03 9:54:45 PM

    I don't see anyone here mentioning about the perilous effect that foreign purchases have made (and continue to make) on the housing market and the future of the economy.

    With such a high percentage of foreign investors purchasing (mostly non-mortgaged) properties in Toronto, Vancouver, and other major cities, it is no wonder that the values have increased by over %15 this year alone.

    Although we are not a mortgage brokerage, we have been in the mortgage referral and renovation facilitation business since 1988, and I agree with Sarah: Those of you (most of you) who have only been in the industry for less than 15-20 years are totally clueless as to what a real recession in the industry can be.

    People today whine when the houses don't go up by over 5% for the year. In 1989-1991, much of the condo market had increased substantially and quickly due to the government's lax rules regarding foreign investment.

    Much of such investment actually helped the economy at the time, bringing mass construction jobs and satellite industries to Ontario.

    Unfortunately, the locals (working Canadians who have a real-life stake in where they live and work) are being priced right out of the housing market, where only foreign investors or inherited homes command the day.

    By waiting too long before even minimally taxing this type of ownership, the government has placed us all in jeopardy. The feds know that even a hint of any change in the rules could and would start an avalanche of such foreign sellers (who will have no stake or interest in what would happen to the city or the country as a result).

    On the other hand, if things continue as they are, house prices will continue to quickly skyrocket until hitting an abrupt ceiling (like an out-of-control elevator going up) and the market will fall.

    Increasing the down payment may be one of several logical approaches, but who gains and who suffers? The increase in down payments would mostly affect first-time homebuyers, who would surely be shut out of the marketplace.

    If the down payment must be raised, why double it? Why not increase it incrementally?

    Why not also doing something about the foreign investment rules?

    Why not put in place even a modicum of rules for foreign ownership (maybe force these investors to hold properties for a minimum of 5 years, for example, rather than allow them to speculate to this extent, where they will be able to take the money and run, leaving us "working stiffs" to suffer in the aftermath of what has the potential of becoming an extremely violent "downsizing"?

  • Diana Butler on 2016-06-05 9:13:21 PM

    Our problem is that we have foreign buyers impacting our supply/demand ratios. Taking away the ability of our first time buyers to enter the market while allowing continued foreign investment doesn't seem like a fair strategy to Canadian citizens. First time home Buyers cannot save down payments as fast as the equity is appreciating which does not make for a viable solution.

  • Conrad De Jong on 2016-06-06 1:35:25 PM

    This will do nothing to cool markets in Vancouver or Toronto, it will just keep pressure on the rental market.

    If banks heads are so concerned about heated markets, then stop lending the money, go ahead and tighten up your qualifying requirements. In Vancouver we need more product. This could be accomplished by increasing density, add more floors, instead of SF lots, do townhouses and take some land out of the ALR.

  • Evan on 2016-06-07 10:59:21 AM

    Open up the ALR? Really? So you think that it makes more sense to use some of the most fertile land in the world for housing?

    The increase in Density in Vancouver has done nothing to keep housing affordable. The west end has 7.8 people per square foot, it is the most densely populated piece of land in north america and one of the most in the world. The mayor of Vancouver wants to double that by 2020, to 16 people per square foot.

    If increasing density was the solution, then how has it not worked for Singapore? A city where the cost of living and housing is much higher than Vancouver.

    You only have to look at the average selling price of a condo downtown and realize that it is not a solution.

    Raise interest rates by at least 1%, maybe more, and then you will see the market start to level off. The other people who commented on here are correct, it is the only way to cool an out of control market.

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