How much money do you really need to buy a house?
Based on the average sale price of $320,333 last year, the federal government says you must come up with about $16,000 before you can consider getting a mortgage to buy the rest of that home.
Current rules require mortgage insurance for anyone borrowing more than 80% of the value of their home from financial institutions covered by the Bank Act. Under the rules, consumers must have at least 5% down and cannot amortize their payments over a period of more than 35 years.
Those stipulations came after Ottawa’s supposed crackdown on the housing sector which had allowed zero down mortgages and 40-year amortizations.
Now, with the housing market red-hot again, there is talk about increasing the down payment requirement and shortening the amortization length back to 25 years. Jim Flaherty, the Finance Minister, has said he is keeping a close eye on the sector, which has been boosted by interest rates that have new mortgages being offered as low as 2.25%.
It shouldn’t come as any surprise that the real estate community is fighting against changes that would make it harder to buy a home. This month, the Canadian Association of Accredited Mortgage Professionals (CAAMP) produced a study it says shows an overwhelming percentage of Canadians are shielded from potential interest rate hikes because they opted for fixed-rate products.
But that study also showed a huge portion of those consumers would be in big trouble if they had to come up with a larger down payment. Will Dunning, chief economist for CAAMP, said 65% had down payments that were worth 10% or less of the value of the home being bought.
“Absolutely,” says Mr. Dunning, about whether a change would take some consumers out of the market. “The change in the 40-year amortization just worsened the downturn in the market. In a fragile housing market you don’t want to impose too many restraints.”
Ben Myers, executive vice-president of Urbanation Inc., which tracks Toronto’s condominium market, has little doubt about what would happen if consumers were forced to come up with more cash up front.
“A large percentage of the market is investors and first-time buyers and they are very sensitive to the down payment they need and the amortization because it affects their monthly payment,” says Mr. Myers.
From an industry standpoint, the status quo is easy to defend. The delinquency rate — defined as loans more than 90 days behind — is only 0.45% of the market. That’s well below the 0.70% high reached in the last recession.
Derek Holt, an economist with Bank of Nova Scotia, wonders whether the industry is borrowing customers from tomorrow to fuel today’s market.
“We are overheating at the expense of bringing forward future buyers. The risk here is you wind up a year or two down the round with a demand vacuum,” says Mr. Holt. “Sure, if you tighten the rules you cool demand, but you distribute demand more evenly.”
Basically, people would save a little longer or perhaps buy a little less house.
Taking a more conservative approach to buying is not the worst thing that can happen, says Julie Jaggernath, director of education at the Vancouver-based Credit Counselling Society. More than one person has walked into her agency with credit problems caused by taking on too much house.
“They might buy a home with a smallish down payment but then they furnish it on their credit card,” said Ms. Jaggernath. “It is not unusual to see people spending 60% of their net income on housing costs.”
She suggests looking at your current housing and then doing the math on what your housing costs would be for what you want to buy. “Set the difference aside for six months and see if you can make that budget,” says Ms. Jaggernath.
Her group is anticipating a larger client base when interest rates rise because many consumers are now biting off more mortgage than they can chew.
“Some people want to travel to Mexico three times a year but they can’t. Some people should never buy a home,” says Ms. Jaggernath.
It’s too bad we can’t go on vacation with 5% down and pay for it over the next 35 years. There would be a lot of Canadians lying on a Mexican beach right now.