You still don’t need a lot of cash to buy a house, unless you’re rich

Garry Marr 

You still don’t need much cash to buy a home in this country — unless you are rich.

A fourth-round of mortgage rules unveiled by Jim Flaherty, the finance minister, didn’t touch the one issue the real estate industry is most scared of — increasing the minimum down payment for loans covered by mortgage default insurance which is backed by the federal government. The rule is still that you need just a 5% down payment in Canada to buy a home. It’s actually less when you consider you can add the cost of your mortgage default insurance onto your mortgage taking you up to 97%-98% of the value of your home.

“They just keep going around this. What is the goal here? Not to have a crashing housing market. To protect banks from having huge losses or to protect people from losing their house,” said Ted Rechtshaffen, president of TriDelta Financial. “The elephant in the room is why they didn’t increase the down payment.”

Most of the real estate industry has been loathe to see that down payment level increase and some banks will actually help you get that 5% with what is called a cash back. You get 5% of the value of your mortgage up front in exchange for a higher mortgage rate over the life of the contract. But the statistics are out there that an increase in the down payment would have had a dramatic effect, far more than the 5% of the market Mr. Flaherty suggested would be impacted by his latest changes. A study this month from the Canadian Association of Accredited Mortgage Professionals estimated half a million sales since 2007 would have been lost if the minimum down payment level was doubled. CAAMP asked respondents what would happen if they were asked for a 10% down payment. Of those who purchased since 2007, 45% say it would take them out of market and another 14% were not sure — about 100,000 lost deals a year.

‘Do you really want people using their homes like an ATM?’

One group of people who will have to come up with more cash are the rich, though they are not really that wealthy by today’s housing standards. There will be no more government-backed insurance on homes worth more than $1-million.

“You have the guy with $2-million home who might not want $400,000 tied up [in equity],” said Mr. Rechtshaffen. “You might be a doctor, 30, making $300,000 who doesn’t want to start with a crappy house who wants to buy a house that will be good for 10 years.”

The government is going to force you to pay down your mortgage at a faster pace, reducing the maximum amortization to 25 years which is where it was when this housing boom began. It had ballooned to 40 years at one point. The impact will be that consumers will qualify for less mortgage because of a larger monthly payment, but save thousands in interest.

The banks had already been encouraging consumers to amortize over 25 years by enticing them with low rates, with Bank of Montreal leading the charge with a 2.99% mortgage earlier this year for a five-year term as long you took the shorter length. Vince Gaetano, a principal at Monster Mortgage, applauded the new rules and expects it will cut back on bidding wars on the high end because people who go over $1-million will not be able to get insurance. He added that new rules on the maximum gross debt service ratio to be set at 39% will hamper how large a mortgage a consumer can get. It was 44%.

“What does it mean in real dollars? If I had a client with $100,000 household income, I can no longer use 44%, that’s five grand. In mortgage amount, based on 3.19%, that’s about $90,000 less mortgage they can get,” said Mr. Gaetano. He added that reducing the percentage level for refinancing from 85% to 80% will further impact that market. “When they reduced from 90% to 85% [last year] it killed the market,” said Mr. Gaetano. “But do you really want people using their homes like an ATM?”