BREAKING NEWS: 30 year amortizations for all first-time home buyers, insured mortgages up to $1.5 million

They’re calling it the “boldest mortgage reform in decades” – and those looking to buy their first home are likely to agree.

This morning, the federal government announced sweeping changes to the borrowing criteria for home buyers with two measures:

• Increasing the price cap for insured mortgages to $1.5 million, from the current $1 million (a borrower must take out mortgage insurance when putting less than 20% down on their home purchase).
  
  
• Allowing 30-year amortizations for all first-time home buyers, regardless of their down payment or insured mortgage status, and for the purchase of any newly-built home. 

Also read: Insured vs. uninsured mortgage – what’s the difference?

“Homeownership is a big part of the middle class dream. That was the deal for generations. But today, young adults feel like the possibility of owning a home like the one they grew up in is less and less likely. The prospect of owning a home in Canada needs to be as real for young people today, as it was for any other generation,” states the government’s release. 

The government says the new policies will build upon the Canadian Mortgage Charter, which was introduced in 2023 as a guideline for the assistance expected of banks to provide borrowers who are facing financial difficulty with their mortgage.

“Along with interest rates now going down, the reforms announced today, which build on the Canadian Mortgage Charter, will make mortgages more affordable and put homeownership back within reach for Canadians,” states the release.

Finally… Some real affordability relief

To say these are enormous changes would be an understatement; these are arguably the most accommodative mortgage policy changes seen since 2008, when 40-year amortizations were briefly allowed for insured mortgages. However, that didn’t last long; the department of finance has steadily tightened the criteria for mortgage borrowing since then, bringing the maximum amortization period to 25 years by 2012. The move to cap the maximum purchase price for insured mortgages to $1 millionwas also introduced that year, along with new refinancing rules and debt ratio limits.

Also read: Mortgage term vs. amortization

This follows, and expands upon, the government’s previous announcement that some insured borrowers could have a 30-year amortization period, so long as they were defined as first-time buyers, and were purchasing a newly-constructed property. 

Officially put into place on August 1st, the change – while initially praised for offering some relief to this buyer group – drew criticism for being too restrictive. Given the benchmark price of new builds exceeds the $1-million mark in a number of Canada’s big city markets – such as Toronto and Vancouver – those looking to use the program were either limited to the condo market, or markets where overall home prices were lower. Early numbers released from Ratehub.ca’s lender CanWise Financial found the uptake by September first to be minimal, with just three applications out of 290.

How will this impact housing affordability?

Together, these two changes should materially improve affordability for first-time buyers. By expanding the cap for insured mortgages to $1.5 million, buyers will be able to purchase higher-priced homes with a down payment of between 5 - 19.99%, rather than a minimum of 20% for anything priced over the million-dollar threshold. This will open up home type options for some buyers beyond just the condo market, perhaps even detached, single family homes. Many lenders also offer more competitive mortgage rates to insured borrowers, meaning they’ll likely save thousands on interest, compared to if they had taken out an uninsured mortgage on the same home.

Expanding amortizations for all first-time home buyers will also help move the dial here; this measure has been called for by the mortgage industry for some time as a concrete measure to improve affordability for this buyer group. The ability to spread payments over a longer time period will help with borrowers’ cash flow and qualification ratios, which in turn will help them qualify for a larger mortgage – helpful, particularly in markets where home prices remain above the million-dollar threshold.

According to calculations by Ratehub.ca*, a borrower with a fixed five-year term at a rate of 4.09%  would see their monthly payment lower by $303 dollars ($2,895 vs. $3,198). However, the trade off with a longer amortization is less of the mortgage principal, and more in interest, is paid over that time frame; the example shows our borrower will pay $18,172 less (a total of $173,678) toward their mortgage during their five year term with the 30-year amortization, $20,108 less toward their principal, and $1,936 more in interest payments. At the end of their five-year term, they’d have a mortgage balance of $545,249, compared to $525,142 if they were amortized over 25 years – a difference of $20,107.

*Based on the average home price in Canada, $649,096 and a 10% down payment (total mortgage: $602,296). The mortgage rate is 5-year fixed and the best available as of Sep.16. The information in this chart is for illustration purposes only.

But will this cause home prices to rise?

Yes –  these measures are very likely to drive home prices higher; as we’ve seen in the past, any time borrowing criteria has eased up – such as record-low interest rates during the pandemic – buyers have jumped into the market en masse, ramping up the feeling of urgency and creating seller-market conditions.

Today’s announcement is sure to shake up the doldrums that have defined the national housing market thus far in 2024; according to the latest data from the Canadian Real Estate Association, home sales remained in a “holding pattern” in August, despite two quarter-point rate cuts from the Bank of Canada in June and July (a third quarter-point cut was made in September, after the period in which the sales data was collected). This has been the case all year long, as buyers have been squeezed between steep borrowing costs following the steep 10-part hiking cycle that took place between March 2022 and July 2023.

While the further rate cuts expected in 2024 and 2025 (another two are forecast for this year and perhaps four next, potentially bringing the benchmark borrowing rate to 2.75%) would have spurred buyers to jump back into the market eventually, today’s announcement will likely set the stage for a hot January market.

Will this increase risk in Canada’s mortgage market?

The big question is, will this create risky debt? After all, that’s why these criteria exist, to prevent those with little equity from taking on too much mortgage and protecting the integrity of the banking system. However, as the government put it, the old criteria was based on 2012 housing prices; back then, the national average then was just under $500,000. As of August 2024, it is $649,100 – and obviously much higher in markets like Toronto and Vancouver, where homes of all types are regularly above that $1million mark. So from the government’s perspective, this new policy better aligns with where home prices are at today.

“Currently, mortgage loan insurance is not available for homes purchased for over $1 million. This insured-mortgage price cap dates back to 2012, when home prices were lower. The last decade has seen home price increases in major urban centers, particularly around Toronto and Vancouver, beyond the $1 million cap,” reads the government’s announcement.

“By raising the limit to $1.5 million, effective December 15, 2024, the Government of Canada is bringing the program in line with current housing market realities, enabling more Canadians to qualify for a mortgage with a down payment that is less than 20 per cent and expanding access to the cost savings and security that comes with mortgage loan insurance.”

The bottom line: these new changes will help greatly ease the financial burden for buyers breaking into the market for the first time. Combined with anticipated interest rate cuts in the coming months, these measures could ease Canadian housing affordability to levels not seen in many years.

Also read:

• Bank of Canada cuts target interest rate by 0.25% in September 2024 announcement
• Canadian real estate remained in “holding pattern” in August
• US CPI comes in at 2.5% in August
• GTA home prices eased in August as condo sales plummet
• Mortgage term vs. amortization