Are you considering buying a home in 2016? 


See how the new CMHC down payment laws could affect you.

In Canada, homebuyers are currently required to put down a minimum of five per cent to qualify for Canada Mortgage and Housing Corporation (CMHC) insurance — protection that lenders insist on when providing a mortgage worth more than 80 per cent of the home's value. However, effective February 2016, the federal government is increasing the minimum down payment to 10 per cent on the portion of any mortgage it insures over $500,000. Homes priced at more than $1 million by law require a minimum down payment of 20 per cent, and therefore the CMHC guarantee doesn't apply. Canadians who already hold mortgages will not be affected by the new rules.

Once the new rules are implemented next month, someone looking to buy a $750,000 home would need to have a minimum down payment of $50,000, which is what you get when you add five per cent of $500,000 and 10 per cent of the remaining $250,000. 

While news reports have painted this increase in a negative light for first time home buyers and it does come with some added challenges, it’s important to understand the risks associated with putting down the minimum 5% on a home, even on a home valued at $500,000 or under.

Less equity:

One important factor to consider when making a small down payment is equity, which is the value of your home minus the remaining mortgage amount. Since a low down payment means that the mortgage amount is larger, the homeowner has less equity in the house.  If during that time the value of a home drops, the concern is that they have borrowed more money than they can sell their house for, and as a result, the homeowners would have to come up with funds to pay the lender the difference between what they owe on their mortgage and what they sold their house for.  This was the situation facing many people in the United States during the global financial crisis.

Larger mortgage repayments:

Putting down 5 percent also means a homeowner will have a higher monthly payment than someone who has put more money down. As a result, there's added pressure to make sure that the homebuyers' income is stable and substantial enough to support making those higher payments each month.

So while the new CMHC down payment adjustment may be causing angst amongst some future first time home buyers, keep in mind that most developers have typically required a 10% down payment on all new home purchases. Plus, save for a bit longer and you will decrease your long-term risks and gain great equity in your home.