Finance Minister Chrystia Freeland announced two significant changes to federal mortgage policy Monday, raising the price cap for insured mortgages to $1.5-million, up from $1-million, and allowing first-time home buyers to take out a mortgage with a 30-year amortization for all types of homes.
The government described the announcement as the most significant mortgage reforms in decades. Both changes are to be in place as of Dec. 15.
“These are big moves. This is a very significant step when it comes to mortgages and amortization. It’s something that we have thought through and worked through very carefully,” Ms. Freeland said at a news conference.
Raising the insurance threshold to $1.5-million will help first-time homebuyers in Vancouver, Toronto and many parts of southern Ontario where the typical home price is more than $1-million.
Mortgage insurance, which protects lenders if a homeowner misses a mortgage payment, is required in order to purchase a home with a down payment of less than 20 per cent.
Currently, insurance is not available for homes that cost more than $1-million.
Raising the price threshold to $1.5-million means more buyers will be able to enter expensive markets, and increase competition by allowing would-be buyers to put down much lower down payments on homes that cost more than $1-million.
“This will create competition for sure,” said Tuli Parubets, a mortgage agent with Mortgage Scout who works with homebuyers in the Toronto region. Ms. Parubets said it would help potential buyers who have high incomes but who have not saved enough for a down payment.
The federal government has been under pressure to make housing more affordable for younger Canadians. Allowing first time homebuyers to get a 30-year amortization on resale homes will reduce their monthly mortgage payments. Today’s policy announcement builds on Ottawa’s decision earlier this year to allow first-time home buyers to take out a 30-year amortization on so-called preconstruction homes, or homes that have not yet been constructed.
The mortgage industry applauded the longer amortization and agreed with Ottawa’s reasoning that it would make home ownership more affordable. But it also means that homebuyers will carry their mortgage for a longer period of time.
“Longer amortizations don’t improve affordability,” said Robert Kavcic, senior economist with Bank of Montreal, adding that it pushes Canadians into higher debt burdens for longer.
The federal government also announced that the 30-year amortizations would be available to all buyers of preconstruction homes and not just first-time homebuyers. That could provide an incremental boost for the new condo market, where sales have dropped to multi-year lows.
Preconstruction condos used to be a popular investment for mom and pop investors and high-net-worth individuals, but they have fallen out of favour as the cost of purchasing the new condos have soared.
However, preconstruction experts called it a “nothing announcement.”
That is because buyers already qualify for a 30-year amortization if they make a down payment that is at least 20 per cent of the property’s purchase price, and most developers require buyers to put down a 20 per cent deposit.
“The large majority were already getting 30-year amortizations,” said Shaun Hildebrand, president of Urbanation, a preconstruction condo research firm.
Ms. Freeland said the 30-year amortizations for preconstruction homes was a “supply-side measure.”
“This is about creating more demand for new builds, because we know that, crucially, Canada needs to get more homes built faster,” she said at the news conference on Parliament Hill, where House of Commons sittings resumed for the first time since June.
Concerns over housing affordability and the cost of living more broadly are top of mind for voters and all federal parties are attempting to position themselves as having a plan.
The department said further details will be released in the coming weeks.
Under existing rules for insured mortgages, a minimum down payment of five per cent is required if the home costs $500,000 or less. If the home costs more than $500,000, the purchaser will need a minimum of five per cent down on the first $500,000 and 10 per cent on the remainder.
Also, the maximum amortization period for insured mortgages in Canada is 25 years.
