Aspiring owners should think carefully before buying a home with the minimum down payment. So warns Canada’s most vocal housing official.
"A first-time home buyer purchasing a $300,000 home with a 5-per-cent down payment stands to lose over $45,000 on their $15,000 investment if prices fall just 10 per cent, which we are forecasting,” Evan Siddall, chief executive of the Canada Mortgage and Housing Corp. (CMHC), told a parliamentary committee earlier this week.
This fate could affect a large cohort if they’re forced to realize those losses. An estimated one in three first-time buyers and one in eight new mortgages have less than 10-per-cent equity. Most such folks are putting down just 5 per cent, which, after default-insurance fees, leaves them almost 100-per-cent financed.
When you’re nearly 100-per-cent financed with no backup funds, you can’t move, refinance or sell without a loss.
You’re essentially trapped in your four walls.
That’s an eerie feeling, especially if prices are collapsing all around you.
It’s a depressing feeling if you have children and need a bigger home.
It’s a desperate feeling if you must move to accept an out-of-town job offer.
It’s a panic-inducing feeling if you lose income and can’t pay your mortgage at all.
Home buying with 1-per-cent equity has risk in normal times, let alone during what could be the most severe recession in modern history.
Forget all those economists and their shot-in-the-dark forecasts. What does your gut tell you about where home values might be headed when we’re about to see:
- An estimated 41.3-per-cent collapse in economic output this quarter, according to a Bloomberg survey of economists;
- As many as one in five working-age adults either jobless or with major loss of income;
- Up to one in five borrowers potentially unable to pay their mortgage after deferrals stop (the “deferral cliff,” as CMHC puts it);
- Tens of thousands of businesses that will never again reopen;
- Record mortgage delinquencies that could double the 1980s peak, per CMHC numbers.
Sure, the government is rolling out billions of dollars in various forms of short-term financial assistance, and sure, banks are deferring mortgage payments temporarily. But fast-forward to October when millions could still be off work while deferrals end. A year from now, CMHC fears tens of thousands of low-equity homeowners could owe more than their home is worth.
If you’re anxious to own a home, I don’t blame you. But if you’re not rock-solid financially, renting a bit longer is sensible risk management.
And remember, CMHC will garnishee your wages and pursue you up to the point of bankruptcy if you get an insured mortgage and don’t pay.
Should 5-per-cent down payments be banned?
Government policy makers are considering it and some fear they’ll hike the minimum down payment to 10 per cent.
That’s not going to happen near-term, not across-the-board, anyway. If it did, a price correction could become a price crash. The time to enact tough mortgage rules is before a crisis, not during a crisis.
If credit tightening is measured – i.e., the feds don’t mandate 10-per-cent minimum down payments across the board – then higher down payments on select borrowers is arguably less negative than a potential flood of panic/forced sales from those borrowers.
Timing is key with so much at stake. Plummeting home prices would cost hundreds of thousands of jobs, a nose-dive in consumer spending, record lender losses, limits on refinancing, losses for seniors who rely on equity for survival and so on.
Were Ottawa to suddenly force 10-per-cent down industry-wide, the government could bear the blame for pushing housing off a cliff, and deep down it knows that.
Either way, it’s understandable to at least temporarily require bigger down payments – even 10 per cent – from less-qualified borrowers, those with weaker credit, higher debt ratios, less stable income and few backup financial resources.
If that sounds anything like you, don’t wait for the government to tell you that you can’t buy. Be a happy renter until at least later this year. Then re-evaluate.
Robert McLister is a founder of RateSpy.com and intelliMortgage, and mortgage editor at rates.ca. You can follow him on Twitter at @RateSpy.
