Backgrounder: A More Secure Canadian Housing Market
The Bank Act requires federally regulated lenders to obtain mortgage default insurance (“mortgage insurance”) for homebuyers who make a down payment of less than 20 per cent of the property purchase price. The homebuyer pays the premium for this insurance, which protects the lender against mortgage loan losses if the homebuyer defaults.
By reducing risk to lenders, mortgage insurance enables consumers to purchase homes with a down payment as low as 5 per cent of the property value and at lower mortgage interest rates that are comparable to those received by homebuyers with higher down payments.
Mortgage insurance is provided by Canada Mortgage and Housing Corporation (CMHC), a federal Crown corporation, and two private insurers, Genworth Financial Mortgage Insurance Company Canada and Canada Guaranty Mortgage Insurance Company.
The Government backs 100 per cent of the mortgage insurance obligations of CMHC, in the event that it is unable to make insurance payouts to lenders. In order for private mortgage insurers to compete with CMHC, the Government backs private mortgage insurers’ obligations to lenders (in the event that a private insurer is unable to make insurance payouts to lenders), subject to a deductible charged to the lender equal to 10 per cent of the original principal amount of the loan.
The Government guarantee of mortgage insurance is intended to support access to homeownership for creditworthy buyers and promote stability in the housing market, financial system and economy. As part of its role to promote stability, and to protect taxpayers from potential mortgage loan losses, the Government sets the eligibility rules for new government-backed insured mortgages.
Between 2008 and 2012, four rounds of changes were made to the eligibility rules, aimed at encouraging insured borrowers to build and retain housing equity and take on mortgage debt that they are able to service over the economic cycle.
Today, the Government announced a change to the eligibility rules for new government-backed insured mortgages, affecting new purchases of insured properties priced above $500,000. Effective February 15, 2016, the minimum down payment for new insured mortgages will be increased from 5 per cent to 10 per cent for the portion of the house price above $500,000.
This measure will maintain the current 5 per cent minimum down payment for the first $500,000 of the house price, while requiring a 10 per cent minimum down payment for the portion of the house price in excess of $500,000. Therefore, the minimum down payment will increase only gradually with the price of a house, varying from 5 per cent for homes priced at or below $500,000 to 7.5 per cent just below $1 million (see table below). Properties priced at $1 million and higher will continue to require a minimum down payment of 20 per cent.
For example, a person buying a $600,000 property would be required to pay a down payment of 5 per cent on the first $500,000 and 10 per cent on the remaining $100,000, resulting in a total minimum down payment of $35,000, or 5.8 per cent of the total purchase price.
|Home Purchase Price||Existing Eligibility Rules||Eligibility Rules Effective February 15, 2016|
|Minimum Down Payment Percentage||Minimum Down Payment Amount||Minimum Down Payment Percentage||Minimum Down Payment Amount|
|$500,000 and below||5.0 %||up to $25,000||5.0 %||up to $25,000|
|$600,000||5.0 %||$30,000||5.8 %||$35,000|
|$700,000||5.0 %||$35,000||6.4 %||$45,000|
|$800,000||5.0 %||$40,000||6.9 %||$55,000|
|$900,000||5.0 %||$45,000||7.2 %||$65,000|
|$999,999||5.0 %||$50,000||7.5 %||$75,000|
|$1,000,000 and above||20.0 %||$200,000 and up||20.0 %||$200,000 and up|
The announced measure will take effect on February 15, 2016 and apply to new mortgage loans where a mortgage insurance application is received on February 15, 2016 or later. Homeowners with an existing insured mortgage or those renewing existing insured mortgages will not be affected by this policy change as mortgage insurance is good for the life of any existing insured mortgage.