Thirty year terms for newly built homes in Canada may help some people

The federal government has rolled out new mortgage regulations. Effective Aug. 1, and aimed at addressing the housing crisis and improving affordability for prospective homebuyers of newly-built homes, they can now extend their mortgage term to 30 years, up from the previous 25-year amortization for an insured mortgage.

Increased borrowing power

The extension of the amortization period is intended to lower monthly mortgage payments, making it easier for Canadians to manage their finances. This change could increase a homebuyer's borrowing power by approximately 5%. This means potential buyers might qualify for larger mortgages, enhancing their ability to purchase more expensive homes a benefit to those who may qualify.

Who qualifies?

To be eligible for a 30-year mortgage, at least one borrower on the application must meet the Canadian government's criteria for first-time homebuyers. That includes individuals who have never purchased a home before, have not lived in a home owned by themselves or their spouse in the last four years or have recently experienced the breakdown of a marriage or common-law relationship. Additionally, the home must be newly built and unoccupied.

This applies exclusively to insured mortgages, which are only available to buyers who put down less than 20% of the home's purchase price, with the property price being under $1 million. In markets like Toronto and Vancouver, where entry-level homes often exceed this price threshold, many buyers may find themselves ineligible for the extended amortization. Furthermore, builders of pre-construction units typically require a 20% deposit, further limiting the pool of potential beneficiaries.

Limited impact on affordability

While the new mortgage rules are a step towards making homeownership more feasible, experts believe their overall impact on housing affordability will be limited. Despite the extended amortization offering lower monthly payments, the additional costs associated with the CMHC insurance surcharge—an extra 20 basis points on top of existing premiums—might offset the benefits.

A first-time buyer with an annual income of $100,000 illustrates this point. For a home valued at $405,000, with a 5% down payment, extending the mortgage term from 25 to 30 years would increase the purchase price to approximately $428,000, while reducing monthly payments by just $66. While this could help some buyers in the short-term, the long-term impact on affordability remains uncertain.

Critics and concerns

Critics argue the 30-year amortization plan might not substantially improve market affordability. Those with families seeking larger homes, might not benefit from the extended terms. Existing homeowners looking to upsize and renters targeting properties with multiple bedrooms often fall into the million-dollar price range, excluding them from the insured mortgage criteria.

Moreover, the additional costs associated with the extended amortization could negate the potential savings on monthly payments, raising questions about the plan's effectiveness in making homeownership more affordable in the long run. While the new rules may offer some relief to eligible buyers, the broader housing market may see only a marginal impact on affordability.

The benefits are likely to be limited to a small segment of the population, and the overall impact on housing affordability remains to be seen.

If you would like to discuss this new program further or have questions, please email [email protected] or if you would like to chat you can book a time here on my calendar.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.