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As of Monday, homebuyers in Canada face tighter down payment requirements for properties over $500,000 and under $1 million. The changes are part of the new federal rules intended to temper some of Canada’s heated real estate markets.
No more 5% down payments
Under the changes, homebuyers must now put at least 10 per cent down on the portion of a home that costs more than $500,000.
Homebuyers will now have to put down at least 10% of the purchase price of their home. Any home under $500,000 can still be acquired with a five per cent down payment.
Loan applicants will lose 20% purchasing power
Mortgage borrowers may find themselves unable to afford as much house as they could before, under the new federal mortgage regulations.
Homebuyers with a combined family income of $125,000 will now be restricted to the $500,000 range, instead of the $600,000 range.
Homebuyers with a household income of $80,000 will be capped at $405,000, instead of the former $505,000.
The new rules expose each mortgage applicant to a “stress test,” to determine whether homebuyers could still pay off their mortgage if interest rates were to rise. As a result, the purchasing power of mostly young buyers is going to be reduced significantly, making it harder for them to attain homeownership. On the positive side, it protects young buyers from borrowing more than they could pay off under changing economic conditions. It also seeks to lower the risk of a housing correction to Canada’s economy.
House sales are predicted to drop
Home sales across the country are predicted to fall as much as eight per cent with the rules in place, while home prices are expected to drop by five per cent.
Concern about the rise of shadow-banking
There is also some concern amongst housing analysts that the new rules could lead to a growth in “shadow-banking,” which involves borrowing private money from investors or institutions. While such borrowing isn’t subject to as much scrutiny as the major lending institutions are, they are lent at much higher interest rates ad may put the borrower at more risk.