The Liberal government announced its new down payment rules for mortgages last week. They confirmed that for people wishing to purchase homes over $500,000 in price that the down payment will increase from the current 5%. Finance Minister Bill Morneau said that homes purchased below the $500,000 ceiling will still only require 5% down.

With the new rules any home purchased at a price between $500,000 and $1 million dollar will require 5% down on the first $500,000 of price and 10% down on the remainder of the price. The changes take effect on February 15 and come after an already exhausting serious of changes in the mortgage rules over the last 5 years.

Any home purchased over the $1 million price will still require a minimum of 20% down.

The government has cited several reasons for this change in policy. We break them down below and provide information on why these are flawed arguments.

They want to create a higher down payment for people putting them in less position for risk of default. This however is not the case. The vast majority of people make their mortgage payments and will continue to do so even in financial hardship. Their home is usually the last piece of debt they default on as they need a place to live. Whether they have 5% down or 10% down their ability to make payments will not change. It makes very little difference in their actual monthly payment.

They also want to create stability in an overheated real estate market. This logic is severely flawed for several reasons. The federal minister acknowledged the new measure will affect fewer than 10,000 home purchasers, or one per cent of the total market. This will not create price stability in the overheated Vancouver and Toronto markets.

“We’re looking at some housing market risks, some pockets of risks, that are important . . . in Toronto and Vancouver. This measure carefully targets that to make ensure that the homeowners in those markets are protected.” The fact is that the overheated housing market is caused primarily by speculative buying at the higher end of the market causing prices to rise overall. The first time home buyer market with their minimal down payment is not driving prices higher. It is people coming in with cash offers and no subjects who are bidding over asking price that are driving prices higher and not the first time buyer with as little 5% down. We have seen intense bidding for properties at the higher end of the market and this is the cause of the overheated market.

While debt levels in Canada continue to rise it is not housing debt that is the major cause for concern. It is unsecured debt. Credit cards, lines of credit and personal loans are all very easy to obtain and in some cases require very little qualification. This is the primary cause of debt increase and this issue has not been addressed by the government at all in 5 years.

There has been an immense effort by the government to restrict access to mortgages with too many changes to go over in this one article. However, very little has been done to tackle the issue of unsecured credit which is the main problem. People obtaining a mortgage go through a stringent documentation process while those wishing to get unsecured credit often have to provide very little if no documentation at all.

Whether you have 5% down or 10% down, if the market takes a correction you are still going to make your payments as long as you have a job. If you don’t have a job and no savings it doesn’t matter what your down payment is you won’t be able to make your payments. In terms of risk for lenders, the lowering of risk for themselves is very nominal whether a consumer has 5% or 10% down. When you take into account CMHC insurance fees, realtor fees to sell and any nominal market drop, if a bank has to foreclose on a property they will lose money in either scenario.

The government has been warning of a market correct now since 2008 – that’s 7 years!! Eventually they might get it right!

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