What the 30-year mortgage changes mean for consumers

Despite Wednesday’s jump in U.S. inflation, the Bank of Canada meeting and Canada’s 14-basis point eruption in five-year bond yields, our leading mortgage rates are still flat versus last week.

Fortunately, our mortgage market isn’t as yield-sensitive as in the U.S. There, some of the most competitive rates instantly shot about 15 to 20 bps higher after yesterday’s scary inflation report.

Lucky for us, Canada has a bit more leeway until most banks raise borrowing costs. Before fixed-rate increases become widespread, yields would probably have to shoot up at least another 10 to 15 basis points or so. But if you’ve got a mortgage closing before September, get a rate hold anyway.

BIG CHANGE AHEAD

The marquee mortgage news of the week is Canada’s re-introduction of 30-year amortizations. They launch on Aug. 1 for default-insured first-time buyers purchasing newly built homes.

Since 2012, insured mortgages have been limited to 25-year amortizations. The change comes at a time of housing affordability is at record lows.

Here’s the quick and dirty on this policy revival:

If you’re a first-time buyer making the minimum five per cent down payment, stretching from 25 to a 30-year amortization would qualify you for roughly 5-to5.5 per cent more home, other things equal. Alternatively, it could reduce the income required to qualify for a mortgage by over five per cent. These calculations are based on a 4.99 per cent mortgage rate and no other debts.

According to Canadian Home Builders’ Association CEO Kevin Lee, this change is expected to lure more buyers into the market, counteract high interest rates, and support prices, which will stimulate more construction. More building helps address housing’s headliner issue: a lack of home supply given excessive immigration.

Separately, the government is also boosting the RRSP Home Buyers’ Plan withdrawal limit for new homebuyers. However, only a small fraction of buyers make use of even the $35,000 limit.

Price-wise, proponents say the new 30-year insured amortization policy will only juice new home values by a small single-digit percentage, but that remains to be seen.

It’s a good gamble either way, given the feds have yet to make a big enough dent in the supply problem.

What we know for sure, is that the measures announced today will lift homebuyer sentiment, and that typically supports home prices overall.