Some Canadians looking to break into the housing market are now able to get 30-year mortgages, a bid from the Liberal government to make owning a home feel more affordable.
Experts who spoke to Global News say that while some homebuyers are likely to see their borrowing power increase because of the new regime, the overall impact on housing affordability is likely to be limited.
As of Thursday, some first-time homebuyers will be able to stretch the amortization, or the length it takes to pay back the entirety of the mortgage loan, to 30 years, up from the standard term of 25 years in Canada.
The idea here is that, for Canadians who can’t afford the monthly costs of a mortgage, paying back the full amount over a longer time period will help to reduce the size of regular payments.
Finance Minister and Deputy Prime Minister Chrystia Freeland announced these changes as part of the 2024 federal budget unveiled in April. Earlier this week, she told reporters that the change coming into effect Thursday is part of a suite of measures aimed at improving housing affordability for Canadians boxed out of the housing market.
“That translates to lower monthly payments so more younger Canadians can afford to pay that monthly mortgage on a new home. This is just one of several measures that our government is taking to help younger Canadians save for that first down payment and afford a home of their own,” she said.
Victor Tran, mortgage and real estate expert with Ratesdotca, tells Global News that tacking an extra five years onto the mortgage will likely increase a homebuyer’s borrowing power by “roughly” five per cent, allowing would-be owners to potentially qualify for a larger mortgage.
Robert Kavcic, senior economist with BMO, says stretching out the lifetime of the loan is the equivalent of shaving 75-80 basis points off the mortgage rate when it comes to carrying costs.
“For those that are able to actually access this, it’s a pretty meaningful change from a monthly payment perspective,” he tells Global News.
Note Kavcic’s caveat: “for those that are able to actually access this.”
There are a few criteria needed to qualify for a 30-year mortgage that Kavcic and Tran say are likely to diminish how many Canadians actually benefit from the proposal.
Who qualifies for 30-year mortgages?
You’ll only be able to secure a 30-year mortgage from a lender if at least one of the borrowers on the application meets one of the Canadian government’s definitions of first-time homebuyer.
The government lists never having bought a home before, not living in a home they or a spouse owned in the last four years or having recently had a marriage or common-law relationship fall apart as conditions that could label someone a first-time buyer.
Financial news and insights
delivered to your email every Saturday.
Get weekly money news
Get expert insights, Q&A on markets, housing, inflation, and personal finance information delivered to you every Saturday.
In addition, the home must be newly built and not have been occupied residentially.
Finally, the 30-year-amortization regime only applies to insured mortgages. A mortgage can be insured only if a buyer put less than 20 per cent down on the home upfront and if the purchase price of the property was less than $1 million.
Securing an insured mortgage on a newly built home might end up as the barrier that prevents many buyers in Canada’s most expensive housing markets from qualifying for a 30-year amortization, Tran says.
Many properties in Toronto or Vancouver, even at the entry level, are already priced at more than $1 million, which rules out getting mortgage insurance from an insurer like the Canada Mortgage and Housing Corp.
Tran adds that many builders of pre-construction units require a deposit of at least 20 per cent upfront as they’re in need of early cash flow to get shovels in the ground. But that down payment, too, rules out getting an insured mortgage on a new build, he notes.
“There’s actually not that many people across the country that are going to be able to take advantage of this new program,” Tran says.
Kavcic says many Canadians with families looking for housing right now will be unable to benefit from the longer amortizations.
Either they’ll be existing owners looking to upsize their homes, knocking them out of the first-time homebuyers qualification, or they’ll be renters eyeing a home with multiple bedrooms, likely putting them in the million-dollar-property price range in Canada’s biggest cities.
“At the end of the day, it’s a very small sliver of the home-buying population that this actually impacts,” he says.
Is a 30-year mortgage more affordable?
Critics of the 30-year-amortization plan also question whether it’s truly improving affordability in the market.
Tran notes that taking the extended amortization will see the CMHC add an “insurance surcharge” equal to another 20 basis points on top of the existing mortgage insurance premiums. In Ontario, there’s also tax that must be paid upfront on this insurance surcharge, hiking the closing costs on the property.
Tran crunched the numbers on a first-time buyer in Ontario with an annual gross income of $100,000 and a five-year fixed-rate mortgage of 5.0 per cent putting the minimum five per cent down when purchasing a home worth $405,000.
On a 25-year amortization, that would give the buyer a monthly payment of $2,327.
Extending that to 30 years could see the purchase price rise to roughly $428,000, which Tran calculates based on the increased borrowing power as well as the insurance surcharge and other taxes. That brings the monthly payments to $2,261 over that five-year term, a difference of $66 less a month.
While lower monthly carrying costs and increased buying power could help an initial wave of buyers who can qualify for the new regime, Kavcic questions the long-term benefits to affordability by extending amortizations.
When amortizations get stretched out, prices tend to rise to offset the increased demand, he says, with the knock-on effects seeing Canadians pay more for longer to own their homes.
Kavcic also notes that paying interest for an additional five years will cost Canadians more in the long run, too.
“You’re stretching your debt over a longer period of time, you’re debt-free later and you pay more interest over the course of your loan,” he says. “So Canadians basically taking on more debt for a longer period of time with no real affordability relief.
“At the end of the day, are Canadians better off? Probably not.”
Changes around the length of mortgages available in Canada come as borrowing costs are already declining thanks to the Bank of Canada’s back-to-back interest rate cuts in June and July.
Tran says that despite the two interest rate cuts, housing remains unaffordable in Canada as home prices remain high. With expectations for additional interest rate cuts to come later this year, he says housing activity could pick up sometime this fall, but currently the market is stalled.
Kavcic agrees that overall affordability in the housing market will be dictated by market forces like the Bank of Canada’s policy rate, not the Liberals’ amortization changes.
He expects a slow easing cycle from the central bank will help to lower borrowing costs for Canadians, restoring some affordability for sidelined homebuyers in the coming year.
“It’s going to take some time. But we’re on a path towards better affordability through probably 2025 or so.”