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Bankers at some of Canada’s biggest lenders say they are seeing a shift toward larger down payments on home purchases.
Down payments are a bit of a black box to observers of the real estate business. Average down payments are one of those mysterious data points that are not publicly available, Canadian Imperial Bank of Commerce economist Benjamin Tal pointed out in a research note recently.
But Sean Amato-Gauci, senior vice-president of home equity financing at Royal Bank of Canada, the country’s largest mortgage lender, tells me that the bank has seen average down payments in its uninsured portfolio of mortgages rise by about 10 per cent in the last two years (uninsured mortgages are generally those where the down payment is greater than 20 per cent).
Down payments in the bank’s insured portfolio (banks must insure mortgages if the borrower puts down less than 20 per cent) are also increasing.
And, interestingly, Mr. Amato-Gauci says that down payments are rising not just in terms of dollar value, but also in terms of the percentage that they make up of the mortgage loan. That suggests that there’s more going on here than just rising home prices forcing buyers to put down more cash up front. And since down payments are rising even in the bank’s uninsured portfolio, the trend appears to be something more than people just trying to avoid paying for mortgage insurance.
Mortgage insurance premiums are set to rise by about 15 per cent on average, effective May 1. They vary depending on the size of the borrower’s down payment, but generally add thousands of dollars to the cost of a mortgage.
“Consumers have saved more for down payments in recent years, driven by a number of factors, including improvements in income levels, employment and equity markets,” Mr. Amato-Gauci says.
Canadians have also been inundated with warnings to save more. Top officials in Ottawa have been sounding alarm bells for a few years now about growing debt loads, much of which stem from mortgages.
“I think with all the focus on consumer debt, people are understanding that it’s more important to save for larger down payments before taking on a mortgage,” Mr. Amato-Gauci says.
Sometimes they can’t do it on their own. He notes that “what we have heard is that more parents are helping first-time home buyers with their down payments.”
I asked bankers at two of the other big banks if they were seeing the same trend toward larger down payments and, off the record, they both said that they are.
“Yes, we are seeing higher down payments in the overall business mix,” one replied. But he said he doesn’t think it’s about savings rates.
One factor that he points to is the various rule changes that have tightened the mortgage market. For instance, in July, 2012 the government said it will no longer back insurance for home purchases over $1-million. “Suddenly everyone buying those homes was putting 20 per cent down,” this banker said, whereas some used to put down less.
The third banker, at another of the big banks, said that his institution has seen a notable drop in the percentage of its mortgages that have down payment of less than 20 per cent.
But he said the biggest shift his bank has seen is actually in the percentage of mortgages that have down payments of 35 to 40 per cent, which has risen significantly.