End 5% Mortgage Down Payment? Experts Fear 'Devastating Impact' On Some Homebuyers

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Some of Canada’s top bankers are so worried the housing market has grown out of control that they are urging the government to make it harder for them to lend out mortgages.

But critics say the bankers’ proposal to end five-per-cent minimum down payments on insured mortgages wouldn’t cool off the heated housing market — it would only delay young peoples' dreams of getting a foothold on the property ladder.

Both the CEOs of Scotiabank and National Bank have come out in favour of raising the minimum down payment for home purchases.

louis vachon
National Bank president and CEO Louis Vachon is urging the federal government to raise the minimum down payment on mortgages. (Photo: Paul Chiasson/Canadian Press)

“For the longest time, we had minimum 10 per cent cash down and we had 25-year maximum amortization and that worked very well," National Bank CEO Louis Vachon told Bloomberg last week.

“I think over a period of time that’s where we need to gravitate back to."

The federal Liberals already tightened mortgage rules recently, limiting the five-per-cent down payment for insured mortgages to loans below $500,000. For any part of an insured mortgage above $500,000, the borrower has to pay 10 per cent down.

Economists largely agree the rules have had little impact on the market so far.

'Devastating impact'

But some mortgage experts fear further tightening of down payment rules would backfire.

“Were regulators to heed these bankers, it would force untold thousands of young Canadians to rent (or keep their parents’ company) significantly longer,” mortgage expert Robert McLister wrote.

“Today, the number one reason young Canadians don’t buy homes sooner is the current equity requirements. Over two-thirds of CMHC insured buyers, for example, can only scrounge up 5 per cent to 9.99 per cent down payments.”

McLister added: "When hearing bank bigwigs opine on down payments, one has to wonder how long it’s been since they were first-time homebuyers."

brian porter scotiabank
Scotiabank CEO Brian Porter says he is worried about the Toronto and Vancouver housing markets, and his bank has pulled back on mortgage lending in these cities. (Photo: Canadian Press)

Dustan Woodhouse, a broker with Dominion Lending Centres, says raising the minimum down payment would cool the wrong part of the housing market — the lower end where young homeowners make purchases, instead of the high end that has seen wild price growth recently.

A down payment hike "would have zero impact on average home prices, zero impact on the market as a whole, but a devastating impact on a few hundred, perhaps even a few thousand families” that can’t afford the higher down payment, he told Mortgage Broker News.

“Were regulators to heed these bankers, it would force untold thousands of young Canadians to rent (or keep their parents’ company) significantly longer."
— Robert McLister, mortgage expert

Some experts have suggested that government policy target the high end of the market, such as with a “luxury tax” on high-price properties, not unlike what British Columbia has introduced.

According to a report at Global News, the federal government is looking into the possibility of such a tax.

Taking foot off the gas

Scotiabank isn’t waiting for government intervention, and has cut back on its own lending in Canada’s residential mortgage market.

“We’re a little concerned about housing prices in the Greater Vancouver area and Toronto," Scotia CEO Brian Porter told Bloomberg TV Canada last week.

“We just took our foot off the gas the last couple quarters in terms of mortgage growth for the reasons I cited, in terms of Vancouver and Toronto."

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