I had two different experiences this week that involved this illusion of a “new rule” that forces all buyers to put down a minimum of 10% as a downpayment.
Where did people get this from?
Well I’m here to clear things up and give you the complete 411 on how the “new mortgage rules” work and where and when the 10% comes into play…
I’ve been emailing with a client of mine in the past week as he is sitting on the fence about whether to buy a small house in Leslieville or whether to extend his current lease on Heward Street for another year.
We had actually exchanged about 5-6 emails, discussing everything from land transfer tax to renovation costs, before he ever broached the subject of the “ten percent downpayment.”
I wondered why, all of a sudden, he wanted to change course and double his downpayment. Since we started talking last summer, he was always intent on putting down five percent and keeping the rest of his money “working for him.”
I finally asked him why he wanted to put down 10% on his new house, and then he said it:
“Well, because I have to…”
He went on to explain that his understanding of the new mortgage rules were such that the minimum downpayment had been increased from 5% to 10%.
He could not be more mistaken.
He could try, but he would not be successful.
(okay, I stole that line from an episode of Friends…)
I explained the new mortgage rules to him, and he felt a bit silly. But he also felt relieved, and a little overjoyed as well. He was now jet-set on purchasing a house.
But I asked myself why this happened in the first place, and I realized that perhaps it’s because I simply assumed people knew how the new mortgage rules worked.
Do you know what my favorite movie line of all time is?
It actually comes from the classic yet awful movie Under Siege 2: Dark Territory, and it was said by this guy:
Do you know this guy?
He is the consummate “actor that you know, but you don’t know.”
You know you’ve seen him before in a half dozen things, but you have no idea who he is, or what you actually saw him in. His name is “Eric Something.”
When bad guy #1 reports that he just “assumed” that Steven Segal’s character was dead, Eric Something replies:
“Assumption is the mother of all f-ups.”
What a line!
And of course, I was the creator of my own fate when I simply assumed that the entire world read through Jim Flaherty’s new mortgage legislation back on February 16th, 2010.
But they probably didn’t.
What I find the most incredible, however, is that a colleague of mine has a client who was specifically told by her mortgage broker that she now has to come up with 10% down! By her mortgage broker! There are people in the industry who don’t even understand the rules!
Let me make this perfectly clear:
Owner-occupied properties, both freehold and condominium, require a minimum five per cent downpayment.
And that’s it!
Where there could be some confusion is with respect to re-financing.
Home owners can now only borrow up to 90% of the value of their homes for re-financing. This is down from 95% as had been previously. The rule was instituted to prevent people from taking too much equity out of their homes.
Perhaps this begs the question “why” somebody wants to borrow 90% of the value of their home?
Maybe they can make more money than the 4.49% they’ll be charged in interest.
Maybe they take regular trips to Columbia and bring back suitcases with false-bottoms.
Bottom line: you can only borrow 90% of the value of your home. And I guess in a roundabout way, this could have been misconstrued as a change with respect to the minimum downpayment on a property.
Other changes worth mentioning, now that we’re at it, involve the minimum downpayment for investment properties.
If you have your name on title for one property, a second property would automatically be deemed a “non-owner occupied unit.” It seems to reason that you can’t occupy two units at once, right?
The minimum downpayment for non-owner occupied units has risen to 20%. This rule was instituted to prevent investors from over-extending themselves. No longer can you run around and purchase properties with 10% down or even 5% down. There’s a reason that all the pre-construction developments have started asking for 20% instead of 15% or 10%; it’s tougher for everybody to get financing these days, developers included! They need to collect heftier downpayments from buyers so their projects can get financed by the banks.
And the last change that was instituted back in February has to do with the qualification process.
All borrowers must meet the qualifying standards using the five-year fixed term rate even if they choose a mortgage with a lower interest rate or shorter term.
I guess this just puts us all on a level playing field.
So there you have it; perhaps it’s two months too late, but better late than never.
To all those buyers out there that are being told by their inept mortgage brokers with four months’ experience that they need a minimum of 10% down – you don’t.
You need 5%.
Bank on it.