Will 30-Year Mortgages Help First-Time Home Buyers?

The Canadian government announced in April that Ottawa would relax the rules on mortgages to allow first-time homebuyers to take out 30-year mortgages when they buy newly constructed homes. The adjustment will go into effect as of Aug. 1. The verdict is still out on whether this will benefit young homebuyers.

As prices skyrocket and interest rates remain elevated, younger households have been largely shut out of the housing market. With a 30-year mortgage, officials hope prospective homebuyers can purchase a single-family home, townhouse or condominium suite.

Canada has experimented with various amortization periods in the past. Nearly two decades ago, there were insured mortgages for as long as 40 years. Officials abandoned this product when there was poor mortgage underwriting by lenders in the aftermath of the global financial crisis. In today’s high-rate climate, so-called infinity mortgages for variable-rate borrowers have become more prevalent.

Meanwhile, since 2012, Ottawa has maintained the present 25-year limit on mortgages with government-supported default insurance.

The Canadian real estate market, of course, is vastly different from where it was even a decade ago. A blend of robust demand, tight supplies, and growing populations has lifted the nation’s housing sector, from major urban centres to small towns, even when mortgage rates are above six per cent.

According to the Canadian Real Estate Association (CREA), the national average home price is approximately $700,000.

So, would a 30-year mortgage work? It is a bit of a yes and no.

Will 30-Year Mortgages Help First-Time Home Buyers?

Market watchers assert that the most significant advantage of a three-decade amortization period is that it reduces mortgage payments by stretching the repayment period.

According to Bloomberg calculations: “A homebuyer who’s borrowing C$800,000 would save about C$380 a month in mortgage payments by stretching the repayment period to 30 years from 25.”

The other component is that homebuyers can purchase a more expensive home because lower mortgage payments will diminish your risk assessment. So, from a lender’s perspective, you could be eligible for more financing.

Economists warn, however, that a main drawback of 30-year mortgages is that interest costs will be higher. Since the amortization period is extended by another five years, lenders have more time to collect interest on your final balance, meaning that you might lose money over time.

Market analysts say the other disadvantages include taking longer to pay off your mortgage and a slower increase in building your home equity.

“The payment bottom line will be better for those people. That’s good news,” Daren King, an economist at National Bank of Canada, told the business news network. “But if you’re not improving the supply issues that we’re having, then you’ll just drive prices upward, and that won’t solve the affordability issue in the medium to long run.”

It is important to remember that Ottawa is also allowing Canadians to access more money to purchase a home. For example, first-time homebuyers can withdraw more funds from their registered retirement savings plans (RRSPs) for a down payment. This change will raise the legal limit from $35,000 to $60,000.

So, as Canadians improve their funding mechanisms to buy a home, will these reforms bolster housing affordability? This is the chief debate industry experts are having today.

Will 30-Year Mortgages Improve Affordability?

One of the principal contributors to the country’s housing woes has been a lack of supply. The government forecasts that the nation will need as many as six million new homes to restore affordability by 2030. The federal government believes that offering a 30-year mortgage for newly built homes will facilitate more housing construction and help narrow the supply gap.

New housing construction activity has been on a downward trend since the March 2021 peak. According to data from the Canada Mortgage and Housing Corporation (CMHC), housing starts tumbled by seven per cent to 242,195 units, falling slightly short of the consensus estimate. Additionally, new home starts in a city like Toronto are projected to slip this year and in 2024.

At the same time, a chorus of experts does not think the policy will stoke demand.

First, it only targets new homes instead of the resale market.

Second, in a recent analyst note, Robert Kavcic, a senior economist at BMO, said that first-time homebuyers accounted for fewer than half of all housing transactions in Canada. While this could change in the future, it has been heading lower in recent years, he explained.

Finally, housing experts say that the 30-year amortization extension will only apply to low-priced homes since homebuyers are required to put down more than 20 per cent on a home valued at more than $1 million. Put simply, the major markets might not witness stimulated activity from this revision.

“I don’t think it stokes demand or it would do anything to trigger the market in a way that would concern the Bank of Canada,” he said.

Wanted: More Housing Supply

Ultimately, Canada needs more homes, whether in large cities or rural communities, to return affordability to the market. Canada’s population is only growing. Earlier this year, it hit 41 million months after reaching the 40-million threshold. All three levels of government are exploring new avenues to foster a climate of more construction and more significant resale activity while ensuring that households can access the real estate market and compete with investors.

Home builders, like the Canadian Home Builders’ Association (CHBA), are confident that the 30-year mortgage amortization period will be an “urgent need for much more new housing supply.”