How much will 30-year amortizations cost for insured borrowers?

This post was updated on June 19, 2024, to reflect revised premiums announced by Sagen in regards to their 30-year high-ratio amortization products.

New eligibility and pricing details emerged this week on the federal government’s plan to extend amortization periods to 30 years for some insured borrowers, provided they are first-time home buyers who are purchasing newly-built homes.

The measure is part of Canada’s Housing Plan – unveiled in the April Federal Budget – which outlines new resources to help improve housing affordability for Canadians. 

The change will give qualifying borrowers the option to take out a 30-year amortization period, rather than cap it at the existing maximum of 25. Currently, anyone who pays less than 20% down on their home purchase (also referred to as a high-ratio, insured borrower) is limited to a 25-year amortization, a rule that’s been in place as of 2012. 

Also read: Insured vs uninsured mortgages: What’s the difference?

Eligible borrowers who want to take out a 30-year amortization period instead of 25 will pay for it via slightly higher premiums on their mortgage default insurance. This coverage is a mandatory add-on cost for anyone with a high-ratio mortgage; it protects the lender from the higher default risk profile of these borrowers. 

The new amortization option will be officially available on the insurance applications that lenders submit to mortgage insurers as of August 1, 2024. All Canadian lenders are expected by the government to offer the new option.

How much will 30-year amortizations cost?

Mortgage default insurance is provided by the Canada Mortgage and Housing Corporation (CMHC), which is a government-backed Crown Corporation, as well as two other private insurers, Sagen and Canada Guaranty.

CMHC is currently offering the lowest premiums for those who wish to take out a 30-year amortization, adding just 20 basis points to their existing high-ratio premiums. The premium amount is based on the borrower’s Loan-to-Value ratio (LTV) which reflects the size of the mortgage they’ve taken out. An LTV within the range of 80.01% - 95% is classified as a high-ratio mortgage.

Update: As of June 19, 2024, Sagen has revised its 30-year premiums for eligible borrowers to a surcharge of 20 basis points, matching that of CMHC's. While official communication has yet to be released by Canada Guaranty, it's expected the third insurer will follow suit with its premium pricing.

CMHC high-ratio mortgage default premiums:

As of June 19, 2024, these premiums are roughly 0.55% lower than those previously offered by Sagen and Canada Guaranty, which both used the following pricing:

Sagen and Canada Guaranty high-ratio mortgage default premiums :

How does this translate into the amount paid on mortgage default insurance? Assuming a theoretical borrower has taken out a $400,000 mortgage, they would pay $13,200 for CMHC insurance, compared to $15,400 with Sagen or Canada Guaranty, based on the following:

• • Using 85-90% bracket
  • 3.3% vs. 3.85% 
  • Premium = $400,000 (mortgage amount) X tax rate 
  • CMHC = $400,000 x3.3% = $13,200
  • Sagen/Canada Guaranty = $400,000 x3.85% = $15,400 

Savings = $2,200

Who is eligible for a high-ratio 30-year amortization?

The federal government also released further details this week on the eligibility criteria for 30-year amortizations.

At least one purchaser must be a first-time home buyer

At least one of the borrowers on an application must be a first-time home buyer, as defined by the following criteria:

• The borrower has never purchased a home before;
• In the last four years, the borrower has not occupied a home as a principal place of residence that either they themselves or their current spouse or common-law partner owned; or,
• The borrower recently experienced the breakdown of a marriage or common-law partnership. On this point, the regulations will follow the approach that the Canada Revenue Agency has taken with respect to the Home Buyers’ Plan.

The home must be newly constructed

The property being purchased must be newly-built, meaning it has never been previously occupied for residential purposes. Notably, the government points out, this does not exclude new condos where there’s been an interim occupancy period (when an owner moves into their new unit before the sale actually closes.)

Will 30-year amortizations help improve Canadian housing affordability?

Extending amortizations for the insured borrower group has long been called for by the mortgage industry as a meaningful way to improve affordability. Longer payment timelines can immediately remove pressure on borrowers, as it spreads payments out, making them more manageable and improving the borrower’s overall debt-servicing ratios. 

However, this new 30-year amortization option serves a very limited group of borrowers, as they must be first-timers who have the means to purchase brand new-builds (which often come with 15 - 20% deposit requirements) and must also qualify as high-ratio borrowers, which means the home’s purchase price must be below $1 million.

That particular combination of factors may be tricky to find in Canada’s largest urban centres, given the steep cost of both new and resale housing. For example, according to the Building Industry and Land Development Association (BILD), the benchmark price for a new condo in the Greater Toronto Area came to $1,176,080 in May, marking a year-over-year increase of 10.5%. Single-family homes, meanwhile, fetched a benchmark price of $1,814,774, up a whopping 31.5% over the last year.

That means those looking to extend their amortization to 30 years will likely be limited to condo prices well below the benchmark within large city markets, or look to new development options in less expensive markets.

However, any measure that improves affordability for Canada’s first-time home buyer group is a positive development, and borrowers are to benefit from CMHC’s competitive approach. Given affordability conditions remain at all-time lows, any drop in the bucket helps this group.

Combined with other first-time home buyer federal programs, buyers now have a toolkit of options. And, while the mortgage industry would prefer this relief measure applied to all high-ratio mortgages, this is a start. It will also boost interest in the new construction segment among this borrower group, and further incentivize new supply measures.

Also read:

• Toronto home sales fall 22% in May as buyers await rate cuts
• It became tougher to buy a home in April, despite lower mortgage rates
• Bank of Canada cuts target interest rate by 0.25% in June announcement
• How much does it cost to own a home in Toronto?