Change to default rules turning more into savers

You may think you look like a million dollars, but as far as Ottawa is concerned not a penny more — at least in terms of a government-backed loan.

One aspect of new mortgage rules brought in last year that has received less attention is the regulation to no longer back mortgage default insurance on homes worth more than a $1-million.

In practical terms, it means you need to come up with a 20% down payment before you can buy a home for $1-million. Below $1-million, you need only 5% down but have to buy what can be costly insurance.

Realtors have complained the limit has created a sweet spot in the market for homes valued under $1-million but acted as a cap on those homes priced above.

“I think buyers know that’s a make-sense type of requirement,” said Farhaneh Haque, director of mortgage advice at TD Canada Trust.

Ms. Haque said there were a limited number of clients who might have been opting for a large insured loan with very little down.

“They would have to have great income and not have great savings and not be overleveraged elsewhere,” she says, adding the bank would have long conversations about affordability before approving any such mortgage.

The issue probably has more of an impact in pricier markets like Vancouver where the average home sells in the $650,000 range, meaning plenty of single family homes easily top $1-million.

Vince Gaetano, a principal at monstermortgage.ca, said he was seeing people, before the rule changes, buying houses in the $1.5-million to $1.75-million range with just 5% down.

“Absolutely,” said. “It was mostly professionals, lawyers, doctors.”

Many of the buyers would be still dealing with debt from student loans but they had enough cash flow that lenders were willing to lend them the money.

So what are those people doing now? Some of them are acting exactly the way the government would have hoped. “They are saving more,” says Mr. Gaetano.

However, there are some who have just gone out and gotten themselves approved for second mortgages.

“Private investors will give them the money,” he says.

It works like this: You are buying a home for $1-million. The bank will give you 80% of that or $800,000 because at that ratio you require mortgage default insurance.

You might just have 5% down, so you need to come up with another $150,000. That’s where the secondary lender with a second mortgage comes in — at a rate Mr. Gaetano estimates is in the 12% range.

“These investors are very selective on the profession. They’ve got to have excellent income and credit and that’s usually the professionals,” he says.

“Most of these clients pay off that [secondary loan] in a year. They’re borrowing because they don’t want to wait. In some ways they save money because they don’t have to pay a mortgage insurance premium.”