# New Bank of Canada report suggests increasing down payment



## kimufalcon (Feb 12, 2011)

Bank of Canada released Review today (Aug 18, 2011), suggesting Ottawa to increase down payment requirement.

(note: LTV ratio of 80% = DP of 20%; LTV ratio of 95% = DP of 5%; to lower LTV ratio = to increase DP)

"They consider the impact when the public authorities respond to a credit boom by lowering the regulatory maximum LTV ratio below its long-run setting of 80 per cent. The extent of the countercyclical response of the LTV ratio is determined by a regulatory rule that links the change in the LTV ratio to the level of mortgage credit relative to its long-run value. Housing booms and busts are often attributed, at least in part, to an easing of mortgage-underwriting conditions. We now turn to the case in which lenders themselves supply more credit and consider how the outcome might differ if the LTV ratio was lowered in response."

(source: http://www.theeconomicanalyst.com/c...-now-under-pressure-adjust-down-payment-rules )
(Actual BoC Review http://www.bankofcanada.ca/wp-content/uploads/2011/08/review_summer11.pdf )

What will Flaherty do?


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## Cal (Jun 17, 2009)

By playing with those numbers F could moderate the RE market, while keeping rates at historic lows.


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## K-133 (Apr 30, 2010)

Cal said:


> By playing with those numbers F could moderate the RE market, while keeping rates at historic lows.


This could represent a serious risk to those who put 5% down as there is no guaranteeing they'll have the needed 10-13% upon renewal. A good move for new mortgages but potential disaster for the existing market. This needs to be planned and thought out with extreme caution.

Overall, good policy IMO.


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## HaroldCrump (Jun 10, 2009)

Mere hints, suggestions, nudges and lip service won't help.
The govt. needs to take decisive action to control the housing insanity, the way Minister Flaherty did earlier in the Spring by increasing the DP requirement for second properties and investment properties.
Also, the mortgage qualification based on a 5 yr. fixed rate instead of a P - _X_ variable rate.

Similarly, they need to take decisive action and set the minimum down payment to 20% or whatever.
Right now, the BoC and the MoF are sending mixed messages and talking from both sides of their mouths by keeping rates low yet calling for reduced borrowing.


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## Dmoney (Apr 28, 2011)

The issue is that they're still trying to boost the economy. If the housing market moderates, people won't feel as rich, so they'll spend less and consumption will decline, hurting the economy. Also, people with 5% DPs could end up with negative equity, which could potentially fuel a steeper decline in housing prices. 

I'm all for higher DP requirements, but it has to be eased into and can't cause market-wide panic.


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## Shayne (Apr 3, 2009)

K-133 said:


> This could represent a serious risk to those who put 5% down as there is no guaranteeing they'll have the needed 10-13% upon renewal. A good move for new mortgages but potential disaster for the existing market. This needs to be planned and thought out with extreme caution.
> 
> Overall, good policy IMO.


No one will have to come up with extra $$$. They will be grandfathered.


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## briant (Jun 23, 2009)

I'm all for decreasing the LTV ratio. The inflated prices we are seeing right now is mostly due to the relaxing of mortgage rules from the last 10 years.


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## HaroldCrump (Jun 10, 2009)

Dmoney said:


> The issue is that they're still trying to boost the economy.


I think we all know what happens when you try to boost the economy by pumping up the housing market.


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## kcowan (Jul 1, 2010)

Dmoney said:


> Also, people with 5% DPs could end up with negative equity, which could potentially fuel a steeper decline in housing prices. ...


Als anyone with only 5% down has to pay the CMHC/Genworth insurance fee of 3% so their real equity is just 2%!


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## kubatron (Jan 17, 2011)

this is total bull____ on so many levels.

first of all it was the same finance minister that introduced exotic mortgages like zero-down and 40 - year amortization

secondly, he backtracked as soon as he saw the disaster in the States (no foresight whatsoever- why introduce this legislation period?)

third, lenders get around no zero-down mortgages by offering 95% cash-back 5% mortgages

and fourth, perhaps most crucial, when will the Government stop putting their hands where they don't belong, and let the market do what it does, without manipulating it any further?

increased rates were seen as one way of cooling the housing system - now, that won't happen.

increasing the down payment will punish the market too severely. it will cut off the first-time buyers, kill the people looking to sell and upgrade, etc 

totally pathetic


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## marina628 (Dec 14, 2010)

I think they should focus on the debt servicing ratio ,I know plenty of people who probably can afford to carry a house but the down payment is holding them back ,mainly my own tenants.Also 5% cash back mortgages mean the buyer has to have the 5% downpayment themselves and the bank gives them the money 1 business day after closing.Maybe 5% plus cmhc fees would be a good compromise to not shock the market too much.Many years ago the requirements were 10% and it seems people managed to come up with that amount.
It will mainly affect the markets where a townhouse starts at $500,000 but may save some people a life of being house poor if maybe they are forced to realise maybe they cannot afford that house and renting may not be so bad.


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## financialnoob (Feb 26, 2011)

I like the idea of increasing the down payment. There are people who could carry a house like marina mentioned, but a lot of those people are depending on their homes appreciating in value to cover their investment. People who can only afford to put the minimum down may also be more likely to run into financial problems/defaults if there are any bumps, like a major repair or a temporary job loss.

This data is American but the point remains that mortgages with less than 20% down have a significantly higher default rate. This is true even with a small difference in downpayments.

For example, in 2002, 1.5% of mortgages with 20-25% down defaulted compared to 6.6% of mortgages with 15-20%. By 2007, those figures rose to 6.4% for mortgages with 20-25% down, and 15.7% for mortgages with 15-20% down. When times got tougher, the percent of defaults rose significantly.

At the very least, I'd like to see the 5% down, 5% cash-back mortgage go away.


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## dogcom (May 23, 2009)

They are trying to find ways in the last few years of slowly backing down from the crazy stuff they allowed like 40 year mortgages and so on.

I think the government has a crucial role to play in setting up the rules and such so crazy stuff like the US doesn't happen and then let the market decide. If you let the market decide without restriction then you get a great boom and then you must allow the great bust and depression to follow to clean it up.


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## Homerhomer (Oct 18, 2010)

The faster home prices go up the faster they will come down crashing when interest rates eventually do go up in 5 or 10 years, steps to ensure a soft landing, such as small increase in downpayment, or as some changes recently introduced, are welcome.


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## arie (Mar 13, 2011)

kubatron said:


> this is total bull____ on so many levels.
> 
> first of all it was the same finance minister that introduced exotic mortgages like zero-down and 40 - year amortization
> 
> ...



This is dead on ; the feds were on the road to what happened in the US with zero down mortgages ; my office did one zero down mortgage in Missisauga and the purchaser bought a home with no money down -- i could not believe it ; we just got lucky that the US imploded before we had gone too far down the road ; now they are backtracking like crazy

with the low interest rates people will get into buying a home that they will not be able to carry them if the rates rise ; this could cause the market to crater - look at today's Globe and Mail about home prices in Vancouver; i am in favour of raising the downpayment from 5% to 10% for high ration mortgages and from 20- 25% for conventional mortgages to protect the real estate market in the long run but as has been said it must be done cautiously


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## Charlie (May 20, 2011)

Always be cautious when looking at US data. Some US states have very goofy rules regarding mortgages -- like the mortgagor only being able to go against the home rather then other assets. There was a story this spring about a basketball player earning $12m/yr defaulting on a $1.5m mortgage because the home was only worth $1m or so. That wouldn't happen here. In some US states you can turn in the keys to your underwater home and the only consequence is a hit to your credit rating. Mortgage interest deductability (regardless of the use of the funds) also encourages them to keep their homes highly mortgaged. And they also have many more players and fewer regulations in the lending business. Many considered quite slippery -- even by banker standards. A general mess.

Lenders here have tightened the rules for genuine business risk reasons. The feds can do the same with insurance if it's warranted. But I haven't seen the same default wave here, nor any credible economist forecasting one. The 5%; 25y seems to work fine. (though 20% makes more sense from a strictly financial view -- if you can do it).


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## sags (May 15, 2010)

A couple of banks raised interest rates today on variable rate mortgages.

Rising interest rates and higher downpayments will slow down real estate.

http://www.ctv.ca/CTVNews/Canada/20...ada-increases-variable-mortgage-rates-110823/


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## Berubeland (Sep 6, 2009)

So Kubatron I'm guessing when you say you want the government to stop interfering you don't mean shutting down CMHC completely because that is in fact interfering in the housing market in a way you approve of, but increasing restrictions is interfering in a way you don't approve of. 

"and fourth, perhaps most crucial, when will the Government stop putting their hands where they don't belong, and let the market do what it does, without manipulating it any further?"

Yes I know we also have another mortgage insurer. But how long would they stick around if CMHC stopped insuring mortgages.


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## HaroldCrump (Jun 10, 2009)

I don't know what kubatron meant, however, RE is such a key aspect of the economy that a govt. can't help but interfere in the RE market.
Shutting down CMHC would be a rather nice short cut to US style housing bust.
That said, I think CMHC (and its cousins like Freddie, Fannie, etc.) are horrible ideas.
Governments routinely manipulate the housing market to create artificial booms (bubbles) since there are huge sectors hanging from the coatails of the housing market, like the home renovation market.
Also, a booming housing market means more free revenue for the govt. through the increasing GST/HST, increasing income taxes paid by all professionals linked to the housing market like lawyers, RE agents, etc.
In the long run, it creates a society addicted to debt, wage slavery, interest rates, taxes, and all the other nice things that the govt. can control.
Mission accomplished.


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## Easy Does It (Sep 24, 2010)

The reality is that Lenders go to CMHC first and many will only go to GE as a last resort on exception. Some lenders in the past few years would only insure their mortgages threw CMHC. Why? Simple, when they pool the mortgages together and sell them you can get a premium for them when their backed by the Government (CMHC) which is essentially zero risk. Mortgages that are backed by a private insurer are sold at a discount as there is a possibility that they can go under if market conditions change for the worse. Many insurers in the 90’s went belly up.


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## meddlesomemarmots (Feb 16, 2011)

arie said:


> This is dead on ; the feds were on the road to what happened in the US with zero down mortgages ; my office did one zero down mortgage in Missisauga and the purchaser bought a home with no money down -- i could not believe it ; we just got lucky that the US imploded before we had gone too far down the road ; now they are backtracking like crazy
> 
> with the low interest rates people will get into buying a home that they will not be able to carry them if the rates rise ; this could cause the market to crater - look at today's Globe and Mail about home prices in Vancouver; * i am in favour of raising the downpayment from 5% to 10% for high ration mortgages and from 20- 25% for conventional mortgages to protect the real estate market in the long run but as has been said it must be done cautiously*


I can support this. A message from the feds that they are serious about people not taking on more debt than they can afford would be quite timely, with the prospect of US following low rates coming up. I imagine the worry after the September rate announcement for Ottawa is that people start piling more money into real estate in a dangerous manner, gorging on the rates that will probably be on offer for the next year or so.

Caution is definitely the modus operandi for the policy makers at the moment. Too much stimulation and continuation of borrowing will just about kill the economy, America style, and rebellion of rate increases will just about have the same effects.


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