The federal government is boosting the minimum down payment for higher-priced homes in Canada effective in the new year.
Homebuyers are currently required to put down a minimum of five per cent to qualify for Canada Mortgage and Housing Corporation insurance — protection that lenders insist on when providing a mortgage worth more than 80 per cent of the home's value.
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Starting in February, CMHC will require a 10 per cent down payment on the portion of any mortgage it insures over $500,000. The five per cent rule remains the same for the portion up to $500,000.
"We recognize that, specifically in the Toronto and Vancouver markets, we have seen house prices that have been elevated," Finance Minister Bill Morneau told reporters on Friday, "and we want to make sure we create an environment that protects the people buying homes so they have sufficient equity in their home."
Once the new rules are implemented in 2016, someone looking to buy a $750,000 home would need to have a minimum down payment of $50,000, which is what you get when you add five per cent of $500,000 and 10 per cent of the remaining $250,000.
Banks are forbidden to provide "high-ratio" mortgages — when the amount being borrowed is more than 80 per cent of the home's purchase price — without taking out insurance for it.
Toronto, Vancouver home prices spiral
The government-backed CMHC is by far the largest provider of mortgage insurance in Canada, and although it is the lender that is protected and pays the premiums, virtually all banks will pass these premiums on to borrowers.
Homes priced at more than $1 million by law require a minimum down payment of 20 per cent, and therefore the CMHC guarantee doesn't apply.
Several consecutive years of record-low interest rates have enticed new buyers into the housing market.
According to the Canadian Real Estate Association, average home prices in Toronto are now more than $630,000 — a 7.5 per cent increase over last year. In Vancouver, the average is now close to $1 million — rising by more than 15 per cent in the last year alone.
Morneau denied his government is concerned about a housing bubble.
"We are not fearing anything in particular," he said. "What we are doing is trying make sure we look at areas of the market that present potential risks."
BMO Capital Markets, for one, believes the measure will have a "minimal impact" on house sales and prices.
"Rather than a blunt instrument to cool the market, this is a targeted measure designed to deter a very small segment of buyers from stretching into the market with a very low equity position," said Robert Kavcic, senior economist with BMO.
"The bigger-picture fundamentals driving home price gains in Toronto and Vancouver — restricted detached-home supply, demographic demand, low mortgage rates and inflows of foreign wealth — remain firmly in place," he added.
Even some of the government's own critics are welcoming the hike in down payment rules. NDP finance critic Guy Caron calls it "prudent."
"It will decrease the vulnerability of the CMHC and it will actually increase the equity of buyers in houses because obviously they will think twice about buying a house that might not be affordable to them," he said.
However, Canadian Mortgage Professionals, a group that lobbies on behalf of the industry, believes the move will reduce house sales — which is why it opposes the change.
"Until a year ago, the oil sector and housing market were the leading contributors to job creation in Canada," the group said in a statement. "With one of these two leaders now increasingly hobbled, this is not the time to deliberately hobble the remaining economic leader."