Earlier this month, the Federal Government, working with the Canada Mortgage and Housing Corporation, announced new legislation for down payments on Canadian real estate purchases over $500,000.
As of February 15, 2016, if you're buying a Toronto loft for sale over $500k, the new minimum down payment required in order to qualify for a mortgage will be 10% of the purchase price versus the current minimum of 5%. Lofts for sale in Toronto under the $500k mark will still only require a minimum down payment of 5%, as per the current rules. Down payments of 20% are required on properties over $1M, again, as per current rules.
So, it's properties that fall between $500k and $1M that will soon have a new, higher down payment requirement. In other words, the bulk of the Toronto loft market. How exactly does this impact you?
If you already own a Toronto loft or any other type of residential property, you will not be affected UNLESS you sell and you do not port your current mortgage.
This typically happens for one of two reasons: if you break your current mortgage for a better deal with another lender (remember to check those penalty fees first) or if there's a gap between the close of your current home and your new home that extends beyond the porting allowance outlined in your mortgage terms & conditions, often 90 days. If this is the case, you will be subject to the new rules when applying for a new mortgage.
Now, most homeowners should have enough equity in their homes that this won't be an issue and they can meet the new 10% requirement. However, it's important to understand the new rules before you sell if you're highly leveraged in your current home (i.e. you don't own a lot of equity) and/or you're looking to make a big jump from a starter condo to a higher end or luxury Toronto loft and were relying on the old 5% rule and our current, low interest rates to carry you to your dream home. It's really this latter category of buyer that the new rules are trying to temper - those who want it all now, over extending themselves because of cheap credit.
It's also important to understand the rules if you've been thinking of selling soon as you may want to change "soon" to "immediately". If your loft is valued over $500k, it may be worth listing now. If you have a great property that should sell quickly and you're prepared to move within 30 days or less, you can list now and close before February 15th, allowing the new owners to squeeze in under the current, lower down payment rules.
It's probably only worth considering a quick sale if your property appeals to young couples as we think they'll be most affected by the new rules. Many young couples, even though they're first-time buyers, are able to purchase their first condo or loft for over $500k because of their high combined household income and low mortgage rates. Yet many do not have a lot of savings. These are the buyers who will be scrambling to make a purchase this January.
We do expect a sales surge over same period last year because of this and as a seller, this can mean bidding wars. To ensure you get top dollar for your loft, make sure that you work with a loft expert who understands not just the larger Toronto real estate market but the Toronto loft market specifically and someone who offers premium marketing services.
For a lot of first-time homebuyers - particularly urban dwellers - it's actually not the monthlies that are the biggest barrier to homeownership as some people believe. This is particularly true for downtowner's given the high cost of rental rates that are often the equivalent of a mortgage + maintenance fees or close to it. It's saving the down payment that's a killer with so little disposable income leftover at the end of each month and rapidly rising real estate values.
Without help from the bank of mom and dad, many first-time buyers are stuck in a financial paradox. For every dollar socked away in savings, the cost of properties in Toronto rises twice that amount. As such, these new down payment rules have been met with some disdain, being seen as yet another barrier to homeownership. But it's really not a bad thing to discourage buyers from leveraging themselves too high.
It used to be that the vast majority of first-time buyers were purchasing modest, affordable starter homes or condos in Toronto, staying longer and slowly working their way up the ladder. And most homeowners' debt to income and debt to equity ratios stayed within the safe zone. These days, changing market conditions have led to a climate where first-time buyers are leveraging themselves well beyond traditional levels and carrying more debt than ever in Canada's history. This is happening for a number of reasons including:
a) rapidly increasing property prices in Toronto where the new "affordable" really isn't affordable for most first-time buyers, i.e. you need more now than ever before in order to get that first foot on the property ladder,
b) a widening gap between property prices and wage increases, making higher mortgages and lines of credit the only way many young home buyers can even enter the real estate arena, and
c) cheap credit, making it much more tempting for first-time buyers (for that matter, buyers at any stage of their real estate journey) to borrow more in order to get more now, rather than making that slow property ladder climb over the next 10 or 20 years.
In short, buyers need more for less and the only way to get that "more" for most first time buyers is credit.
The steps work similarly to Land Transfer Tax where you pay less on the first step or allowance, more once you surpass that limit. Here's an example of a $650,000 loft purchase:
5% required up to $500,000 = $25,000
10% on the additional $150,000 of sales price above this “limit” = $15,000
Total down payment needed on a $650,000 loft will be $40,000 as of mid February versus $32,500 following today’s rules.
These new rules are an attempt to encourage buyers to stay within a reasonable debt to income ratio which is wise, regardless of the current climate. Remember, today's low mortgage rates aren't going to hold for the duration of your mortgage and your wages may not rise in proportion, i.e. it may get more difficult to carry your property in future so don't over leverage yourself at time of purchase.
But how great an impact the new legislation will have is questionnable - many critics think this is more about political posturing than bringing about real change to Canada's real estate markets.
According to Finance Minister Bill Morneau, these changes are meant to “reduce taxpayer exposure and support long-term stability” in Canada’s housing market but "will impact one per cent or less of the market” so is change for less than 1% of buyers really going to support long-term market stability?
While it's true that the portion of the market impacted by the new rules is likely to be small (and this move has inadvertantly spurred a "rush to market" surge this Dec & Jan), for those who find themselves thousands short in savings, the sting will be all too real and they won't care if they represent 1% or the other 99% of the market. They just want to get that first foot on the property ladder.
As a result, some buyers may opt to speed up their property hunt, attempting to close before February 15th, or start looking at less expensive lofts under the $500k mark if they're unable to borrow from family or other sources in order to meet the new, higher down payment requirements.
Our advice if you're buying a loft this year and only have 5% down is to remember that list price is not sales price. And it's not just houses that are selling over list.
With many Toronto lofts but particularly rare, hard lofts in coveted, boutique buildings, we've seen a surge in bidding wars in 2015. If you're looking for this type of rare property, you should look a little under your maximum in order to ensure that you can stay under $500k (incl LTT) with your final offer and actually stand a chance at being the winning bid. You can read more about how to win bidding wars in our previous post on the topic.
Lead image: Mortgage Down Payment © Karen Roach, shutterstock.