Proposed changes to remove price caps and extend amortizations on insured mortgages will help renters break into the ownership market, Ottawa argues, but experts are raising flags about the impact on home prices.
Proposals unveiled Monday, which one expert called “some of the most significant mortgage policy reforms that we have seen in many years,” will affect first-time buyers, those buying a newly constructed home and anyone taking out an insured mortgage.
First-time homebuyers, as well as those purchasing new builds, will soon be able to take out insured mortgages with a 30-year amortization, up from the typical 25-year payback period.
The Liberals are also raising the price cap for taking out insured mortgages to $1.5 million compared with the previous bar of $1 million.
Both proposed changes would go into effect on Dec. 15.
Deputy Prime Minister and Minister of Finance Chrystia Freeland made the announcements on Monday in Ottawa where members of Parliament are reconvening for the start of the fall sitting in the House of Commons.
She positioned the move as helping Canadians to afford a first home.
“It is going to put the dream of home ownership in reach for more young Canadians,” she told reporters.
Some experts who spoke to Global News on Monday said the moves could indeed help affordability in the short-term, but the “Band-Aid policy” could have consequences that see home values reaccelerate as more buyers compete for homes.
The proposals come after the Liberals instituted new changes as of Aug. 1 to allow 30-year amortizations for first-time homebuyers taking out insured mortgages on new builds.
Extending amortizations helps to reduce the monthly burden of carrying a mortgage, though a homeowner is also likely to pay more in interest over the life of the loan.
Calculations from comparator site Ratehub.ca show that extending a mortgage by an extra five years can save the average homebuyer about $300 per month on their payments. (In the case of a 4.09 per cent interest rate and a home value of roughly $650,000.)
After that five-year term, the owner would have paid nearly $2,000 more in interest and have an outstanding balance of $20,000 more than in the 25-year amortization scenario.
Penelope Graham, mortgage expert with Ratehub, tells Global News that a longer amortization also helps to improve debt ratios and overall borrowing criteria, potentially allowing a homebuyer to qualify for a larger mortgage than before.
Graham says that a longer amortization can give a buyer “a little bit more wiggle room” when trying to overcome hurdles like the mortgage stress test.
“So that’s one way that this is going to be quite impactful,” she says.
Raising the cap on insured mortgages can also lower the barriers to entry, particularly in some of Canada’s least affordable housing markets.
Because households have to put down more than 20 per cent upfront when purchasing a home with an uninsured mortgage, the current price cap for insured mortgages creates a significant obstacle for Canadians looking to purchase a property worth more than $1 million.
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In some of Canada’s most expensive housing markets, the average home price is already above that bar, making it difficult for some prospective buyers to save enough to ever own a home.
Under the proposed changes, an individual could potentially put down between five and 20 per cent of the value of a home worth up to $1.5 million, lowering the size of the down payment needed.
Graham says that first-time buyers in Toronto and Vancouver have been largely limited to the condo market if they wanted to own their home, but raising the cap will help them branch out into larger homes in the semi-detached or detached markets.
“This is going to open up other types of housing for this buyer group and it’s going to improve their overall affordability,” she says.
The original $1-million cap for insured mortgages was instituted back in 2012. At that time, the federal government was reining in borrowing conditions after a rapid expansion to allow 40-year amortizations in 2008 — a move Graham says didn’t last long.
But she says since that time, the successive Conservative and Liberal federal governments have largely been tightening borrowing criteria, making this reversal a meaningful move towards looser conditions.
“These are some of the most significant mortgage policy reforms that we have seen in many years,” she says.
It’s also “possible” that the Canada Mortgage and Housing Corp. raises insurance premiums for insured mortgages as a result of the expansions, Graham notes.
In June, CMHC announced a premium surcharge of 20 basis points would be added to the mortgage insurance of first-time homebuyers opting for a 30-year amortization on a new build under the updated rules starting Aug. 1.
Global News reached out to CMHC to ask if any addition surcharges would be applied.
“In regard to the mortgage reforms announced this morning, CMHC looks forward to implementing the changes when they come into effect,” a spokesperson said, with additional requests for comment directed to the Department of Finance.
Home prices could drive higher, experts warn
Freeland said Monday that the Canadian economy grown by roughly 65 per cent since the 2012 cap for insured mortgage was put in place, and that it was time to update that restriction by a similar factor.
The Liberals’ 2021 election platform had included a pledge to raise this cap to $1.25 million.
But the blanket policy sparks concerns from some real estate watchers, who worry that a higher bar will only increase the number of Canadians taking out expensive, insured mortgages backed by the government.
“Do we need this across Canada? I mean, $1.5 million buys you a luxury home in many regions of Canada outside of Toronto and Vancouver,” says John Pasalis, president of Realosophy Realty.
While Pasalis sees marginal impacts on affordability in the near-term from the new proposals, he says the end result is simply driving up demand, bringing more buyers who would otherwise be delaying a home purchase into the market at the same time.
That will drive up purchase prices, he argues, offsetting any affordability impact from the lower borrowing costs and putting more debt on the backs of Canadian households.
“It definitely feels like a short-term, Band-Aid policy,” he says.
“Increasing household debt is not a long-term solution. That’s what we’ve been doing in Canada for a while. It’s not a long-term solution to affordability.”
Graham, too, sees these moves as likely to heat up a cool housing market. Fresh real estate figures released on Monday show that the Bank of Canada’s interest rate moves have failed to spark a rebound in sales so far, with many buyers expecting borrowing costs to head lower through 2025.
A move to further cut mortgage costs and help Canadians to qualify for a home purchase is likely to accelerate those timelines for some buyers, Graham argues.
“I think that this is setting the stage for a hot January market and likely a hot spring market,” she says. “To what extent, it remains to be seen.”
Freeland was asked Monday about concerns that adding more buyers to the housing pool would drive up home prices and end up further eroding affordability.
She defended the moves as giving a “leg up” to younger Canadians, offering them an advantage over established owners in the market.
“With these measures, first-time homebuyers are going to be in a stronger position. We think that’s the right thing to do,” she said.
Freeland also said that part of the motivation in focusing the proposals on new builds is to help incentivize builders to get more shovels in the ground and filling in Canada’s noted housing supply gap.
“We want people to be building more homes faster in Canada. And for them to do that, it’s critical that there be buyers out there for those homes,” she said.
“These are big moves, this is a very significant step when it comes to mortgages and amortization. … It’s important to be thoughtful and careful in this space, and we are and we have been.”
The move was indeed hailed by the Canadian Home Builder’s Association (CHBA) on Monday.
“These types of changes are exactly what CHBA has been calling for, because we simply can’t build homes, be they condos, townhomes or whatever housing form makes sense, if owners can’t qualify for mortgages,” said CHBA CEO Kevin Lee in a statement.
“Better access to mortgages will enable buyers to access the market, driving more housing starts and giving industry a chance to push towards targets to close the supply-demand gap.”
Lee argued that the Bank of Canada’s rate cuts will serve to fuel a rise in home prices even without these policies, and that the best way to get ahead of those pressures is by rapidly delivering more supply.
Pasalis isn’t convinced that the mortgage changes will have a direct impact on supply constraints in Canada’s tight housing market.
He says the only thing that will bring investors back to the pre-built condo market is rising home prices — something that, “indirectly,” he expects these policies will stimulate. Adding demand to a slow housing market will also fuel activity in the resale market, pushing prices higher for existing owners, he argues.
With the Liberal government looking to make a splash as poll numbers struggle in the return to Parliament, Pasalis says these short-term affordability moves targetting renters might just as well boost the mood of the two-thirds of Canadians who already own a home as a residence or an investment.
“People like to see the value of their homes (rise) higher. So is this designed to stimulate housing in that sense and make those voters happy? I suspect that’s probably part of the math here,” he says.
