Federal Government Takes Action to Stabilize Housing Market

Buying real estate in 2016? Be prepared to come up with a bigger down payment. Changes to government-backed mortgage insurance rules were announced last week to maintain a healthy, competitive, and stable housing market.

Effective February 15, 2016, the minimum down payment on new insured mortgages will rise from 5% to 10% for the portion of the house price above $500,000. For any properties up to $500,000 the 5% minimum down payment will remain in effect. Canadians who already hold mortgages will not be affected by these changes.

Finance Minister Bill Morneau announced the changes at a time when the residential real estate market continues to grow; good news against the backdrop of rising debt and tepid growth in the financial markets. According to Morneau, “This measure will increase homeowner equity, which plays a key role in maintaining a stable and secure housing market and economy over the long term. It also protects all homeowners, including many middle-class Canadians whose greatest investment is in their homes.”

Residential real estate continues to rise in value (by 1.1% in the third quarter of 2015) even as financial assets are falling (down 0.6% in the same period). A recent Statistics Canada report stated that the ratio of financial assets to non-financial assets (primarily real estate and consumer durables) declined from 112.7% in the second quarter to 111.4% in the third quarter of this year. Mortgages accounted for the largest share of total borrowing in the quarter ($15.6 billion) compared to $3.7 billion of consumer credit.

Tax and financial advisors should discuss mortgage debt management and equity planning with millennials and their boomer parents, who may be in a position to help with the increased down payment requirements as part of their succession planning discussions. With new increases to tax rates at high income levels, which last-surviving spouses or single parents may bear on their terminal returns, it may now make more sense to gift your adult child the extra 5% down payment to acquire a home during your lifetime, rather than wait until your death to provide them with smaller after-tax inheritances for mortgage debt management.

Additional Educational Resources: The January T1 Advanced Tax Update, which will cover the changes for 2015 T1 tax filings, 2016 personal tax planning in light of the December 7, 2015 Ways and Means Motion and audit-proofing for the transfers of family assets.

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