In a bid to address Canada's housing crisis, Deputy Prime Minister and Finance Minister Chrystia Freeland announced new changes to mortgage rules on Sept. 16, set to take effect in December, aimed at making housing more affordable.
Author
Stuart Snaith
Associate Professor, Gustavson School of Business, University of Victoria
The first major change is an increase in the price cap for insured mortgages, raising it to $1.5 million from $1 million.
In Canada, if potential home buyers have less than a 20 per cent deposit, they are required to have default insurance. Mortgage insurance protects lenders against default and helps consumers buy homes with as little as five per cent down payment. Prior to this announcement, insurance has only been available for homes priced at $1 million or less.
The second change is the extension of amortization periods. Until this year, buyers who needed default insurance on their mortgages were limited to a 25-year amortization period.
In August, this was relaxed to allow first-time buyers to purchase newly built homes with a 30-year amortization. This has now been expanded to allow first-time buyers to buy any home. In addition, anyone wanting to purchase a new build can now benefit from a 30-year mortgage.
Freeland told reporters the changes will "put the dream of home ownership in reach for more young Canadians." But how likely are these changes to make home ownership more attainable for Canadians who increasingly view it as a distant dream?
Drawbacks to keep in mind
Each element of this announcement will increase buyers' ability to purchase a home. More buyers will be able to access 30-year mortgages, which goes hand-in-hand with lower mortgage payments. Additionally, more of the Canadian housing stock will be within the price cap for insured mortgages.
However, even with these changes, affordability remains an issue. In the case of the increased price cap, Canadians still need to be able to afford the mortgage in the first place. Given that few Canadians can afford a mortgage of over a million dollars, the impact of the 30-year mortgages is likely to be the more significant of the two measures.
In the case of 30-year mortgages, while payments will be reduced, more interest will be paid over the life of the loan. Consider a loan of $700,000. With a 25-year mortgage at five per cent, the monthly mortgage cost would be $4,071 (ignoring the cost of default insurance). With a 30-year mortgage on the same basis, this falls to $3,736. However, it also comes with an approximate 24 per cent increase in interest paid over the life of the loan.
Another important aspect to keep in mind is that Canada already has the highest household debt to disposable income in the G7. Where does most of this debt come from? Mortgages.
A 2023 report from the Canada Mortgage and Housing Corporation found that 75 per cent of Canada's household debt comes from mortgages. These high levels of debt can inflict significant damage during times of economic crisis.
Obviously, larger mortgages means more debt. While the new mortgage rules are designed to give buyers more flexibility, the long-term impact of larger loans on household debt and the wider economy remains to be seen.
4 million homes by 2031
While these new changes should stimulate demand, especially for new-builds, Freeland believes the demand these measures generate will "incentivize more new housing construction and tackle the housing shortage." These changes are part of the government's efforts to meet their objective of building almost four million new homes by 2031.
The government's ability to ensure these new homes are built will be key to ensuring these new mortgage rules deliver on their promise of making housing more affordable.
In the absence of increased supply, the risk is these changes could result in higher prices, especially as the Bank of Canada continues to cut interest rates and given this week Canada's inflation rate finally hit the Bank of Canada's target. Indeed a recent report by Desjardins cautions that increasing the length of mortgages could worsen affordability.
Over the next few quarters, the interplay between rate drops, new mortgage rules and various federal initiatives to address housing supply will have to be watched closely. To make matters more interesting, the possibility of an early election may result in an alternative approach to housing affordability given recent polling suggesting Pierre Poilievre's Conservative Party could likely form the next majority government.
Stuart Snaith does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
