Stress test 2.0? What a 10% minimum down payment requirement would mean for Canadian buyers

Canadian Mortgage and Housing Corporation CEO Evan Siddall’s recent address to the Standing Committee on Finance contained a plethora of negative projections, from housing prices falling by 18 percent to one-fifth of all Canadian mortgages being in arrears by September. But it was his comments around the advantages of making 10 percent down payments and CMHC’s attempts to limit demand that have the industry wondering if an increase in the minimum down payment requirement may be in the cards.

As Siddall made his case for the approaching “deferral cliff”, a scenario where unemployed homeowners who have deferred their mortgage payments are asked to start making them again despite not returning to work, he shared with parliamentarians two key pieces of data that associate five percent down payments with increased risk.

The first, a chart that tracks the percentage of loans in deferral by their loan-to-value ratios, showed that 69 percent of the mortgages currently in deferral fall into the 90-95 percent LTV category. The implication seems to be that if there were fewer borrowers putting down five percent, the deferral cliff Siddall described might be less towering.

Siddall singled out first-timers again when he discussed the potential losses they could face if housing prices fall by 10 percent.

“Unless we act, a first-time homebuyer 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 by 10 per cent,” Siddall’s statement read. “In comparison, a 10 per cent down payment offers more of a cushion against possible losses.”

Because CMHC will be on the hook for any insurance claims triggered by failing mortgages, Siddall also said the Corporation is evaluating its underwriting policies.

“So if housing affordability is our aim, as surely it must be, then there must be a limit to the demand we help to create, especially when supply isn’t keeping up,” he said.

That’s the same logic that gave Canada its mortgage stress test. Many brokers are worried that a 10 percent minimum down payment would have a similarly chilling effect on business.

“I think it would be a comparison you could draw a lot of parallels to,” says Anthony Venuto of Centum Intouch Mortgage Solutions.

As with the stress test, Venuto feels that any desire for a doubling of the down payment requirement will be driven by the risk associated with lending in Canada’s most expensive markets – Toronto, Vancouver, Montreal, etc. – even though most, if not all, properties in those cities sell for over $500,000, making them ineligible for five percent down payments. It will be the smaller, softer, far more numerous markets where consumers will see their spending power evaporate.

“What about the rest of Canada?” he wonders.

Impact on brokers
Chris Kolinski operates for iSask Mortgage Brokers in Saskatoon. The Bridge City’s real estate market has been soft as warm cheese for the past five years. With homes there appreciating so slowly, buyers often opt for putting five percent down.

“I’d say about 80 percent of the purchases I do are five percent down purchases,” Kolinski says. “It actually comprises a big chunk of the business I do.”

Kolinski is in regular contact with brokers in Alberta and Manitoba. He says minimum down payment deals are a common occurrence.

“If this was to happen, I anticipate a big hit to homebuyers in the prairie provinces for sure,” he says.

John Vo of Spicer Vo Mortgage in Halifax, another market where buyers are regularly able to purchase homes will five percent down, understands the desire of insurers and lenders to protect their assets by requiring higher down payments. But it’s an odd move for institutions that require a high volume of home purchases to keep the wheels spinning and the margins as high as possible.

“They’ll have more quality mortgage holders,” Vo says, but far fewer overall.

With down payments being one of the biggest challenges facing homebuyers, Vo says brokers will be expected to work much harder for their clients if the down payment requirement doubles. It will require a delicate balance: Brokers will have to set hard savings guidelines for their clients if they hope to qualify, but buyers frustrated by their situations may decide to switch brokers if they’re constantly being told something they don’t want to hear.

“We’re going to have to become even more firm with our customers in saying, ‘This is your plan. You really need to stick to it,’” he says.

For Kolinski, an increase in the required down payment is a challenge he’s ready for.

“I’ll adjust the same way I did when they introduced the stress test back in 2016,” he says. “It was a huge panic for me when it happened. But ultimately, it comes down to us as brokers being able to adapt to the market.”

Few in the industry seem to think the change is imminent. Either way, the discussion around down payment levels has shone a harsh light on the anxiety-ridden situation facing first-time buyers.

“We’re hearing more and more that home ownership isn’t a right, it’s a privilege,” says Verico COO Mark Squire. “You feel for those first-time buyers. You’re going to see more pressure on the bank of mom and dad to help out.”