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home finance

An illustration of a house standing on a pile of money.Steven Hughes/The Globe and Mail

When revised mortgage rules took effect in July, 2012, a collective groan rippled across the Canadian housing market.

Many who would have qualified for a mortgage insured by Canada Mortgage and Housing Corp. (CMHC) just a month earlier would be hard-pressed to meet the new conditions or had to save for larger down payments.

Others would be shut out of the housing market altogether.

A recent report on the state of Canada's residential mortgage market confirms that the new rules pushed "thousands of potential buyers out of the housing market." The Toronto-based Canadian Association of Accredited Mortgage Professionals (CAAMP) report also looks at how people are putting together down payments, often with the help of family.

The rule changes were the result of the federal government deciding the marketplace was becoming far too overheated, far too quickly. As a result, they capped amortization periods for insurable mortgages at 25 years – down from 30 years previously.

The rule changes also set a new 20-per-cent minimum down payment or equity requirement for obtaining an uninsured mortgage, and significantly tightened debt ratio ranges for borrowers.

"A five-year decrease in the amortization period has the same effect as a one-point rise in interest rates," explains Will Dunning, chief economist with CAAMP. "That made people delay buying if they had to save for a much larger down payment."

CMHC also limited the maximum purchase price or lending value for its insured mortgages to less than $1-million.

Mr. Dunning, author of the CAAMP report, notes that the rule tightening has had a significant impact on home resales across the country. Activity has been lower than it should have been based on economic conditions, especially low interest rates, the report says. But the negative effects are tapering off, the report suggests.

The November report is based on data from various sources, including an online survey of 2,000 Canadians conducted by public opinion and market research firm Bond Brand Loyalty for CAAMP during October, 2014.

Mr. Dunning noted in the report that, although the rule changes were intended to cool overheated markets in cities such as Toronto, Vancouver and Calgary, the policy shift has cost jobs and economic growth in other, less robust, centres across the country.

The CAAMP report confirms a trend: namely, parents or family members providing gifts or loans to help their younger, home-buying relatives meet the minimum 5-per-cent down payment requirement to qualify for a CMHC-insured mortgage, or reach the 20-per-cent down payment threshold to avoid paying CMHC premiums altogether.

According to the survey, 17 per cent of Canadians accepted gifts or loans from their parents or family members for a home down payment between 2010 and 2014, an increase from 13 per cent between 2005 and 2009.

The average down payment was 20 per cent between 2010 and 2014, down slightly from 22 per cent from 2005-2009.

The other key sources of funding for down payments, according to the survey: personal savings (40 per cent), loans from financial institutions (27 per cent) and withdrawals from an RRSP (12 per cent).

It's in the white-hot urban neighbourhoods where many buyers simply have no choice but to turn to family.

"I see a lot of gifts from parents, as well as parents co-signing [mortgages]," says Patricia Collins, a mortgage broker with Dominion Lending Centres in Vancouver. "In this market, it's often the case that people can't put 20 per cent down because most family homes here cost more than $1-million, but you also can't get mortgage insurance for any home over $1-million."

Indeed, the average price of a single family detached home in Greater Vancouver increased to $995,100 in November, a 7.9-per-cent increase from 2013, according to the Real Estate Board of Greater Vancouver.

That creates a financial conundrum for younger buyers hoping to live out the live-work-play ideal in urban neighbourhoods where even modest homes cost a small fortune.

Best options for down payments

So, beyond simply using personal savings, what are a home buyer's best options when making a down payment?

Consider borrowing from your RRSP – but be careful

As Mike Boyle, president of Calgary-based mortgage brokerage Mortgage Group Inc. notes, an RRSP withdrawal makes sense for younger buyers with a long-term earning horizon who can pay the funds back over time.

Under Canada Revenue Agency's Home Buyers' Plan, first-time home buyers can withdraw up to $25,000 in a calendar year from their RRSP to use as a down payment. The money must be repaid to that RRSP in instalments within 15 years. If those instalments aren't paid annually, the amount due that year is taxed as income.

But Mr. Boyle cautions that macroeconomic tsunamis such as the Great Recession of 2008-09 can throw a wrench in even the most deftly planned repayment schedules.

"The problem [with borrowing from an RRSP] is that you could end up in a bad market and lose your job, which means you could not only lose your house, but also your RRSP," Mr. Boyle explains.

Under Canada Revenue Agency rules, even borrowers who declare bankruptcy are required to make annual repayments of funds withdrawn from their RRSP until the full amount is repaid.

Why paying mortgage insurance is a 'fact of life' for many buyers

While some prospective homeowners might fret about saving the 20-per-cent down payment necessary to avoid paying CMHC insurance – which runs as high as 3.35 per cent of the value of the mortgage loan – Mr. Boyle's advice is to embrace the insurance if saving more simply isn't an option.

"For the first-time buyer, paying CMHC is a fact of life," he says. "If you told buyers they could [make the down payment] with $10,000 down or $80,000 down, there aren't many people who can do the latter.

"From my experience, I'll tell people with a 15-per-cent down payment to try to squeeze out the extra 5 per cent to avoid paying CMHC premiums. But when we see people putting 5 per cent down, the lion's share aren't asking how they can avoid CMHC. In a lot of cases, the 5 per cent is coming from a gift."

Sometimes paying CMHC premiums might make sense

While Ms. Collins urges the majority of her clients to avoid paying CMHC insurance whenever possible, she has seen some home buyers take a different approach.

"For those who are in a good financial position, it comes down to what the CMHC premium will be if they make a down payment of less than 20 per cent, compared to what they would earn if they invested their money somewhere else," she explains.

In some cases, keeping their savings in equities or other investment vehicles could yield higher long-term returns.

Whatever the down payment strategy, Ms. Collins makes the same recommendation: Do what it takes to get onto the property ladder, particularly in hypercharged markets such as Toronto and Vancouver.

"There's a lot of upside to just getting into the market," she says. "My advice to home buyers is to just get into the market when it makes sense for them, especially with the rule tightening the government has introduced."