Mortgage change applies to ‘shockingly narrow’ group
Experts say new rule allowing first-time buyers to take out 30-year amortization instead of 25 will do little to solve affordability, housing crises
The federal government’s change to borrowing rules announced Thursday allowing first-time homebuyers to take out a 30-year mortgage if purchasing a new-build home helps few people and does little to solve the affordability and housing crises, real estate experts say.
Finance Minister Chrystia Freeland said the government will change mortgage rules to allow first-time homebuyers to take out a 30-year amortization — the length of time it takes to pay off a mortgage — instead of the standard 25-year period. But, it can only be for insured mortgages and homebuyers looking to buy newly constructed homes. Insured mortgages are for homeowners who pay less than a 20 per cent down payment.
So how helpful are these new measures for first-time buyers?
The 30-year amortization extension applies to a “shockingly narrow” group of people, said mortgage broker Ron Butler. “It only applies for those looking to buy new builds and a low priced home because you have to put more than 20 per cent down on a home that’s $1 million or more.”
First-time buyers are just under half of all transaction activity in Canada, with their share falling in recent years, Robert Kavcic, senior economist at BMO said in an analyst note on Thursday. And, insured mortgages have fallen to just around 15 per cent of mortgages in recent months.
New mortgage rule does not apply to resale homes
The 30-year mortgages don’t apply to first-time homebuyers looking to buy in the resale market, said John Pasalis, president of real estate brokerage Realosophy, which is partly due to the federal government not wanting to stimulate demand for housing.
“Imagine people who are firsttime buyers being able to borrow more money from the lender for any property listed under $1 million,” he said. “It would become more competitive and drive up prices, so this doesn’t apply to resale for a reason.”
The government has also likely targeted newly built homes to increase demand, hoping that supply will follow, to incentivize more homes being built, said James Laird, co-CEO of Ratehub and president of CanWise mortgage lender.
New home starts in Toronto reached 47,400 in 2023 but could drop to as low as 32,000 in 2024 and 27,000 in 2025, according to a Canadian Mortgage and Housing Corp. (CMHC) forecast. “New construction is in a hell of a fix,” said Butler. “This is designed to help the new home construction industry.”
Most homes in Toronto cost more than $1 million
Properties that cost more than $1 million require a 20 per cent down payment, meaning those mortgage holders don’t need to be insured.
Most detached and semi-detached properties in Toronto cost more than $1 million resulting in first-time homebuyers turning to townhomes and condos for their first-home purchase. It allows firsttime buyers to pay five per cent for their down payment, but they must take out mortgage loan insurance.
While condo new builds are the most common property type being built in Toronto, usually builders need a 20 per cent deposit to get the project built, said Pasalis.
“You don’t need insurance if you put 20 per cent down on a home,” he said. “Builders typically need a certain amount to build the preconstruction. It’s a very small segment that puts down less than 20 per cent for precon units.”
Extending amortizations doesn’t improve affordability
Having a longer period of time to pay off a mortgage allows first-time homebuyers to borrow more from their lenders and stretches out their mortgage payments, resulting in smaller payments every month, said Karen Yolevski, chief operating officer at Royal LePage.
“The monthly payment will be a bit lower compared to someone with a 25 year amortization,” she said. “But they will be paying their mortgage for longer and they will be paying more interest. But those cons are outweighed by a buyer being able to afford a home.”
However Pasalis cautioned that extending amortization periods doesn’t improve affordability, or solve the housing crisis.
“We could see amortizations being extended to 40 years or 50 years,” he said. “But it’s not an adequate solution.”