New mortgage rules could make buying a home more complicated and expensive

Buying a new home isn’t cheap but despite the new costs it’s unlikely the housing market is going to take a sharp downturn anytime soon. Reuters.
Buying a new home isn’t cheap but despite the new costs it’s unlikely the housing market is going to take a sharp downturn anytime soon. Reuters.

New mortgage rules kicked in on February 15, 2016 that saw an increase in minimum down payment requirements for home and condos that cost over $500,000.

What does this mean for the average homebuyer?

It means little if you are not looking to spend above $500,000 for a new home or condo. However, that home that is worth more, their down payment is definitely going to go up in comparison to what it would have been a year ago.

How does the new calculation work? It’s actually quite simple. The down payment required for the first $500,000 is going to be the same as it has been in the past, meaning five per cent down. This works out to $25,000 if the property costs exactly $500,000. However, what if the property costs a $800,000?

In that case, we separate the calculation for the first $500,000 and the $25,000 down payment that results and add the additional $300,000 that the house costs, with an down payment of 10 per cent.  The total minimum down payment will now be $55,000. In comparison, the previous down payment for the same property would have been $40,000.

That is quite a bit more to have to spend on a down payment for a new home. Why the change?

The federal government is trying to slow down the housing market, especially in two key locations: Toronto and Vancouver. The issue that has the government worried, specifically in these two locations, is that the prices of homes are highly inflated, possibly leading to an eventual crash in the real estate market.

Still, if the government believes this will do much to cool the markets, they may have miscalculated. Sure, first-time home buyers may have to scrimp, save and borrow a little more for their down payment. However, those who are already homeowners looking to buy a more expensive home can just add the higher cost of the down payment for their new home onto the sales price of their old home.

Adding to that, mortgage rates are at historical lows in Canada, which makes it relatively easy to borrow money if you qualify for a mortgage.

Finally, it’s unlikely that foreign investors looking to buy property in Canada are going to be deterred by higher down payment requirements, especially in Toronto and Vancouver.

Home buyers, especially first-time buyers, should be aware that costs can add up quickly, not just due to the increase in down payments but also because closing costs in and of themselves are costly. One of the necessary closing cost expenses a person will incur is a real estate lawyer, who should be contacted early in the home purchasing process.

Buying a new home isn’t cheap but despite the new costs it’s unlikely the Canadian housing market is going to take a sharp downturn anytime soon.

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