The truth behind changes to minimum down payments

The federal government recently announced changes to minimum down payments on properties priced below $1 million.

Many headlines are oversimplifying and inaccurate. The change is not as simple, nor as painful, as a jump to 10% down on homes over 500K — this is not the correct math at all.

It is a sliding-scale increase, meaning that the extra dollars required rise gradually (i.e., a $675,000 home now requires a down payment of $42,500 or ~ 6.3% down — NOT 10%).

As such, the impact on markets is expected to also be gradual and marginal, save for possibly Calgary where an already cooling market needs anything but further restrictions.

One might ask why further restrictions for prime borrowers are required at all in a nation with historically (and consistently) low arrears rates. Mortgage arrears rates have come down from their ‘high’ of 0.43% in 2009 to a current 0.29%.

The answer is, in a word, optics.

There is an undeniable statistical link between the amount of equity homeowners have in a property and those same homeowners’ likelihood of falling into arrears or foreclosure.

More equity = less risk. The optics of this change appear as good governing. This looks like an effort to moderate rapidly rising prices in the two largest markets (Toronto and Vancouver) and increase stability.

This regulatory change also has a net effect similar to a subtle increase in interest rates from the Bank of Canada.

More restrictive lending guidelines are far more targeted than the Bank of Canada moving interest rates, which affect the entire economy, not just real estate.

Moving interest rates is simply too big a macro-economic lever to lean on in an effort to slow, or lower, home prices in just two cities of the nation.

This brings us to U.S.A.’s decision to hike their own interest rates by 0.25%, a first in nine long years.

There is much fanfare around this being a signal that the U.S. economy is resilient and recovering. Perhaps so, but the increase itself is marginal and it will be the quantity and pace at which any further hikes are introduced that will tell the entire story.

Interestingly, this move acts for the Bank of Canada as a de facto rate cut here.

It will further soften the Canadian dollar against the U.S.

Arguably, this will lower the chances of the Bank of Canada reducing Prime at their next meeting. Economists are still predicting no movement in the Canadian prime lending rate for 2016.

In other words, no action on CDN interest rates is expected in either direction anytime soon.

Jean-Guy Turcotte is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

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