What Is a Sliding Scale and How It Affects Your Approval
You’re likely aware that the minimum down payment to avoid mortgage default insurance is 20%. What many may not be aware of is that a down payment of greater than 20% down payment will sometimes be required. As house prices rise substantially and people are looking at moving to different areas in the country, it’s an important highlight to consider and plan for during your pre-approval process.
For the most part, 20% will be sufficient. However, there are times where you may encounter a sliding scale, which can increase the minimum down payment requirement substantially. This can catch some people off guard. In the 2021 election has suggested they will make changes to the sliding scale and earlier in the year many lenders have been making changes to there sliding scale, however it does impact those purchasing or moving up to the over 1 million dollar range, at this moment in time.
What Is A Mortgage Sliding Scale?
A sliding scale is where the minimum down payment changes once the purchase price hits a predetermined threshold. A lender will accept the standard 20% down payment, but only up to a certain value. Once the purchase price exceeds this value, a higher down payment is required on the excess amount. For example, a lender may accept a 20% down payment up to the first $1 million, but may require a 50% down payment for any amount above $1 million. This is what is known as a mortgage sliding scale.
What Is The Purpose Of A Sliding Scale?
It’s directly related to the lender’s risk. The higher the purchase price, the more the value can fall if the housing market were to correct. A sliding scale gives the lender added protection, and therefore reduces their risk. When a market correction occurs, it does not correct evenly. Some areas will see a much larger drop than others. Higher valued properties may also see a larger correction. A $5 million home for example has much more room to fall than an $800,000 home. A $5 million home also appeals to a smaller demographic, and can take longer to sell even in the hottest housing markets.
There are two major factors that can trigger the use of a sliding scale:
- High purchase price
- Property location
High Purchase Price
Sliding scale policies will vary from lender to lender, with the more stringent adhering to the example used above. They will allow a 20% down payment only up to the first $1 million of the purchase price, but will require a 50% down payment on the amount above $1 million.
- This means the minimum down payment to purchase a $1.5 million property would be $450,000.
- $200,000 for the first $1 million, and then another $250,000 for the additional $500,000.
- While some mortgage lenders are this strict with their sliding scale policy, most lenders are more flexible.
- What is the maximum purchase price you can hit without requiring a down payment over 20%?
The higher you go above $1 million, the fewer lending options become available. If you’re purchasing in a major metropolitan area such as the GVA, GTA you can generally go up to a purchase price of around $2 million without triggering a sliding scale. In some cases even higher. The higher you go, the fewer lending options become available. This doesn’t mean you’ll be paying a higher rate, and excellent mortgage rates may still be available to you. Exceptions can sometimes be made to exceed a lender’s sliding scale limit, however these are granted on a case by case basis. The more demand for the area and the stronger the borrower, the easier it becomes for us to press it higher.
Note that the sliding scale limits may be reduced for condos, and policies will vary from lender to lender. If you are purchasing a condo for more than $1 million, it’s best to check with us first before putting in an offer to purchase.
Property Location
Another major consideration is the location of the property. The further you purchase outside of a major centre, the more stringent the sliding scale may become. In some cases, the sliding scale may start as low as $500,000, which is not uncommon. If you were looking at purchasing a $750,000 cottage for example, the lender may only accept a 20% down payment up to $500,000, with a 50% down payment required for the additional $250,000. This would result in a minimum down payment of $225,000, or 30%. The sliding scale requirements can vary substantially depending on the location.
This is where it gets interesting.
If you are purchasing with LESS than 20% down payment in a rural area, you can go up to $999,999 without running into sliding scale issues. I know this sounds counter intuitive, and flat out defies logic. This is because a down payment of less than 20% requires mortgage default insurance such as CMHC. This gives the lender the additional protection they need and reduces their risk, therefore it eliminates the need for a sliding scale.
Conclusion
It’s not just ‘some’ lenders who have a sliding scale policy. They all do. It doesn’t matter if you’re applying to a major bank, credit union, or monoline lender. They all use sliding scales.
Anytime you are planning on purchasing a property, never assume you’ll be okay because you have a 20% down payment. Part of getting pre approved is providing all the credit, income and down payment verification however every property is unique and subject to approval based on several unique merits If your budget is over $1 million, you’ll definitely want to check with us first to include the area and types of properties you are planning on making an offer on. By doing so, you ensure we won’t run into any sliding scale complications and at least you will be prepared to adapt the strategy accordingly.
Angela Calla is a 17-year award-winning woman of influence which sets her apart from the rest. She is without a doubt, a true expert in her field. Alongside her team, Angela passionately assists mortgage holders in acquiring the best possible mortgage. Through her presence on “The Mortgage Show” and through her best-selling book “The Mortgage Code“, Angela educates prospective home buyers by providing vital information on mortgages.
In August of 2020, at the young age of 37, Angela surpassed $1 Billion dollars in funded personal mortgages. In light of this, her success awarded her with the 2020Business Leader of the Year Award.
Angela is a frequent go-to source for media and publishers across the country. For media interviews, speaking inquiries, or personal mortgage assistance, please contact Angela at hello@countoncalla.ca or at 604-802-3983.
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