30-year amortization for insured mortgage and the rise in its premium
Last week, two months after the Liberal government moved to introduce 30-year amortization for insured mortgages, the Canada Mortgage and Housing Corporation (CMHC) announced that it will boost its premium for this type of mortgage by 20 basis points.
Starting Aug. 1, Canadian first-time homebuyers purchasing a newly built home for less than $1-million with a down payment smaller than 20 per cent will be able to opt in to an insured 30-year amortization period – up from a 25-year maximum – with the additional 0.2 per cent premium hike.
The new mortgage policy was designed to make home ownership more tenable for young Canadians by curbing monthly mortgage costs, according to Finance Minister Chrystia Freeland. But the strict eligibility requirements and CMHC’s recent premium hike have cast doubts on the true benefit of the new policy for housing affordability.
Samantha Power, an Ontario-based mortgage broker, says the higher premium on mortgage insurance – which protects lenders in case of mortgage default and is mandatory when buyers can make less than 20 per cent in a down payment – is just the tip of the iceberg.
“It isn’t a massive difference, but it’s still an increase. If we’re trying to help first-time homebuyers, why are we gouging them with an insurance premium?”
The bigger problem, says Ms. Power, is the strict criteria to qualify for the 30-year insured mortgage, which will exclude many Canadians trying to access the resale market and limit many qualifying buyers to the condo market. “This is strictly for first-time homebuyers purchasing new builds – I don’t know any new builds around me, around the GTA, for less than a million.”
In Ontario and British Columbia, the criteria will firmly exclude anyone except condo buyers, says James Laird, chief operating officer of Ratehub.ca, a mortgage comparison platform. “There are no newly built single-family homes under $1-million in the big cities,” he said.
Ratehub’s calculations show that homebuyers who do fulfill the eligibility criteria will qualify for 6 to 7 per cent more in mortgage loans with the new 30-year amortization, which is not a trivial amount.
On a $400,000 loan, the difference in monthly payments between a 30- and 25-year mortgage amortization would be about $200 a month, says Mr. Laird. “I would call that significant – that’s a full grocery shop for a family.”
But there’s just one problem, says Mr. Laird: those who qualify would be limited to new construction homes, meaning their dollars won’t go as far.
“The price per square foot of a new build is significantly higher than the price per square foot of a resale,” said Mr. Laird. “So even though you qualify for more money, your dollar actually doesn’t go as far.”
For condos in particular, Ms. Power says buyers will also need to factor in additional condo fees on top of the higher purchase price for new constructions.
Despite the possible pitfall of dishing out higher interest payments over time, mortgage broker Ron Butler believes 30-year amortizations should be available across the board, as they make monthly payments more manageable for Canadians. These mortgages don’t always need to come with significantly higher interest accumulation or lower home equity, he says.
“The idea that by increasing the mortgage to 30 years you’re adding so much interest, that makes an assumption that no one chooses to make prepayments or to reduce the amortization down the line,” says Mr. Butler. “You can make lump sum payments up to 20 per cent, you can increase your mortgage; there are lots of things people do.”
As it stands, said Mr. Butler, the few mortgage seekers who would meaningfully benefit from the new policy are those in the Prairies and the Maritimes. In these regions, new builds might actually meet the under-$1-million threshold and include some single-family homes (though the caveat is that new builds are rare in places like the Maritimes.)
In addition, these parts of the country are not the ones facing the worst affordability crisis.
In Royal LePage’s 2024 ranking of Canada’s most affordable real estate markets, cities such as Edmonton, Red Deer, Alta., and Saint John topped the affordability index.
In Edmonton, for example, the median housing price in the first quarter of 2024 was $442,200, which aligns with Alberta’s median household income of $95,900. In Toronto and Vancouver, the same housing price measure was well above $1-million, with median household income in the mid-$80,000 range, according to Statistics Canada.
It’s also worth mentioning that Toronto saw a dramatic drop in new-build condo construction this year, with a 52-per-cent decrease from last year, according to an April report from Urbanation.
Damien Charbonneau, co-founder of Nesto, a Canadian digital mortgage lender based in Montreal, said he could narrow down the number of his clients who would benefit from the new mortgage scheme to about 1 per cent.
While he sees the policy as a move in the right direction, he says it would make a bigger impact if the $1-million threshold was indexed to something like the rate of inflation.
Anya Ettinger, a Toronto-based real estate agent who often works with first-time homebuyers says many are also put off by new builds not just because they’re more expensive, but because of the flurry of negative media. “You’re seeing reports now of tons of new build scams, or they cancel projects – people are more weary of purchasing preconstruction.”
Steve Pomeroy, a McMaster professor specializing in housing policy research, says that all things considered, extending amortizations to 30 years for insured mortgages is a positive initiative that should be seen as part of a systemic approach to making housing accessible. It should include stimulating supply while dealing with excessive demand, he said.
He pointed to complementary initiatives such as Minister Freeland’s additional announcement in April that first-time homebuyers will be able to pull up to $60,000 from their registered retirement savings plans to use in a down payment on a home – up from $35,000.
Benjamin Reitzes, an economist with the Bank of Montreal, says that there are inconsistencies in the market that simply can’t be addressed with something like the new mortgage legislation.
“If we continue to get the population growth we had over the past few years, it continues to create upward pressure,” says Mr. Reitzes. “Thirty-year amortization or anything like it won’t be a silver bullet – what has driven the problem is lots of demand.”
Meanwhile, Ms. Power feels like the policy is a missed opportunity. “In the grand scheme of things, who are we helping here? Homebuyers or just the developers?”
This article was first reported by The Globe and Mail
