Canada has announced a significant change in its mortgage policy, specifically targeting first-time homebuyers by extending the maximum loan term to 30 years for those purchasing newly constructed homes. This move is aimed at making homeownership more accessible amidst the challenges of high prices and rising interest rates.
The adjustment in insured mortgage regulations, set to take effect on August 1, was revealed by Finance Minister Chrystia Freeland. The initiative is largely designed to attract younger voters who find themselves priced out of the housing market. "By allowing first-time buyers to spread their mortgage payments over 30 years instead of 25, we're effectively reducing their monthly financial burden, making it easier for them to afford a new home," Freeland stated during an announcement in Toronto.
With Canada's population growing rapidly, the country faces a critical shortage of housing. Although there was an increase in housing starts at the beginning of the COVID-19 pandemic, the momentum slowed as interest rates climbed. Estimates from the government’s housing agency suggest that Canada will fall millions of homes short of creating an affordable market by 2030 if the current building pace continues.
February saw a significant uptick in housing starts, reaching a seasonally-adjusted annualized rate of approximately 253,000 units, marking a five-month high. This growth comes as the population surged by around 1.3 million last year, adding pressure on the government to stimulate further development. Prime Minister Justin Trudeau hinted at upcoming mortgage reforms in the lead-up to Freeland's budget announcement on April 16.
Canada previously experimented with up to 40-year mortgage terms nearly two decades ago but rolled back these measures following the 2008 global financial crisis, which was partly attributed to substandard mortgage lending practices in the United States. Since 2012, a 25-year limit has been enforced on amortizations for mortgages requiring government-backed default insurance.
These insured mortgages are necessary for buyers who can afford less than 20% down payment on their homes. In cities like Toronto and Vancouver, where the benchmark home price exceeds C$1 million, a down payment of over C$200,000 is required to qualify for an uninsured mortgage with a longer amortization period. Borrowing C$800,000 under the new 30-year term could save homebuyers about C$380 monthly, according to Bloomberg's calculations.
"This will certainly make payments more manageable for borrowers, which is welcome news," commented Daren King, an economist at National Bank of Canada. "However, without addressing the underlying supply issues, this may simply lead to higher prices, not solving the affordability crisis in the long term."
The policy does not permit locking in mortgage rates for 30 years, as Canadian rates typically reset more frequently. Freeland also mentioned that existing homeowners facing financial hardships could maintain their extended mortgage terms without incurring fees or penalties. Additionally, the cap on withdrawals from registered retirement savings plans for first-time homebuyers' down payments will increase to C$60,000 from C$35,000.
Bank of Montreal's senior economist, Robert Kavcic, views the new mortgage measure as having a limited impact on the overall housing market, suggesting it is unlikely to significantly stimulate demand or concern the Bank of Canada.
