The Blubber

Canada will relax the rules on mortgages to allow first-time buyers to take out 30-year loans when they purchase newly built homes


The adjustments to insured mortgage regulations will be effective on Aug. 1, according to Finance Minister Chrystia Freeland. This change is primarily aimed at appealing to younger voters who have been struggling to enter the housing market, facing steep prices and high interest rates.

"First-time homebuyers will now have a 30-year period to repay their mortgage instead of 25," Freeland stated in Toronto. "This means lower monthly payments, making it more affordable for younger Canadians to manage the monthly mortgage on a new home."

Canada is grappling with a significant shortage of homes to accommodate its rapidly growing population. Although housing starts increased during the early stages of the Covid-19 pandemic, construction activity slowed as interest rates began to rise. The government's housing agency estimates that at the current construction rate, Canada will face a shortage of millions of homes by 2030 to establish an affordable market.

In February, Canada saw housing starts of approximately 253,000 units on a seasonally-adjusted annualized rate, the highest in five months, according to Canada Mortgage & Housing Corp. The population grew by about 1.3 million last year.

The decrease in construction activity has placed pressure on Justin Trudeau's government to stimulate development. The prime minister hinted last week that mortgage reforms would be included in Freeland's April 16 budget.

Nearly two decades ago, Canada briefly experimented with allowing insured mortgages with a term of up to 40 years. However, this was reversed when substandard mortgage underwriting by US lenders contributed to the global financial crisis in 2008.

The current 25-year limit on amortizations applies to mortgages where government-backed default insurance is required, a rule in place since 2012.

Such insurance is mandatory when the buyer is making a down payment of less than 20% of the home's price. In Toronto and Vancouver, where the benchmark price of a home exceeds C$1 million ($730,000), a down payment of over C$200,000 is needed to qualify for an uninsured mortgage with an extended amortization period.

Stretching the repayment period to 30 years from 25 would save a homebuyer borrowing C$800,000 about C$380 a month in mortgage payments, according to Bloomberg calculations.

"The bottom line will be better for those people. That's good news," said Daren King, an economist at National Bank of Canada. "But if you're not addressing the supply issues we're facing, you'll only drive prices higher, which won't solve the affordability problem in the long run."

This change does not mean that homebuyers will be able to secure rates for 30 years, as Canadian mortgage rates reset more frequently than that.

Freeland also assured existing homeowners who have had to extend their mortgage amortizations due to financial difficulties that they may be able to maintain those longer repayment periods without incurring fees or penalties.

"Canadians work incredibly hard to be able to purchase and afford their homes, and it is only fair that mortgage lenders should assist Canadians in every way possible to afford their homes during times of higher interest rates," she said.

Additionally, first-time homebuyers will now be able to withdraw more money from their registered retirement savings plans for use as a down payment on a home, with the legal limit raised from C$35,000 to C$60,000.

Robert Kavcic, a senior economist at Bank of Montreal, believes the new mortgage measure will have a limited overall impact on the housing market. "I don't think it will stimulate demand or trigger the market in a way that would concern the Bank of Canada."