Akshay Ramprakash in a parkette on Lower Jarvis Street near his home in Toronto on Sept. 27. Mr. Ramprakash is a 38-year-old civil engineer who has spent the past two years looking to buy a two-bedroom condo for himself and his wife.Duane Cole/The Globe and Mail
Concerns are bubbling among first-time homebuyers that the country’s easier mortgage policies will drive up real estate prices and make it harder to buy a property.
When the new rules go into effect in December, first-time homebuyers will be given a longer time to pay down their mortgages, and all buyers will be allowed to put down smaller down payments on homes worth more than $1-million.
But after several Bank of Canada decisions to cut interest rates, it is expected that cheaper mortgages will prompt more demand for housing. Prospective buyers believe Ottawa’s latest policies will only further heat up the market.
“I’m concerned that these new rules will allow people who are less financially responsible to get into the market and increase competition,” said Holly Babaran, a 32-year-old software engineer in Vancouver who has been looking for a three-bedroom townhome or duplex in the area with her partner.
She said she has been saving for years to make a down payment that is at least 20 per cent of the property’s purchase price so that they could handle the mortgage installments. She said they were planning to take out a 30-year mortgage but pay down the loan over a shorter period of time.
But after the federal government unveiled the new rules on Sept. 16, Ms. Babaran started worrying that she and her partner will have to “make less financially responsible decisions in order to compete.”
Mortgage brokers and realtors say they have been receiving dozens of calls from would-be buyers inquiring whether they will be able to get into the housing market and whether they can afford a larger property.
The changes allow first-time homebuyers to take out an insured mortgage with a maximum amortization of 30 years instead of 25 years, which would lower monthly payments because the borrower has more time to pay off the loan. (The homebuyer must pay for mortgage insurance if their down payment is less than 20 per cent of the home’s purchase price.)
It is estimated that monthly mortgage payments on average-priced homes would be about 9-per-cent lower on a 30-year amortization versus 25 years, but borrowers will also incur more debt over a longer period of time and will pay more interest.
“We cannot justify taking on higher levels of debt and for longer periods just because these new mortgage rules potentially allow for relatively lower monthly payments,” said Akshay Ramprakash, a 38-year old civil engineer, who has spent the past two years looking to buy a two-bedroom condo for himself and his wife.
When Mr. Ramprakash was house hunting, he said he noticed that there were many properties priced just below $1-million.Duane Cole/The Globe and Mail
He said he has saved close to $120,000 for a down payment and had been looking at properties just below $1-million, the current cap for an insured mortgage and the price point that requires a minimum down payment of 20 per cent, or $200,000.
The new rules raise the insured mortgage threshold to $1.5-million, which will lower the minimum down payment to under 20 per cent. For example, the minimum down payment required for a $1-millon home will be more than halved, at $75,000, under the new rules.
When Mr. Ramprakash was house hunting, he said he noticed that there were many properties priced just below $1-million.
“Now all those units will comfortably push their asking prices beyond the $1-million mark simply because they no longer have that constraint at the $1-million price point.”
He added: “With the new mortgage rules coming in play soon, there doesn’t seem to be any incentives for sellers to lower their asking prices.”
Chris Pathicheril, 32, wants to eventually buy a home. He and his wife are spending about $2,600 per month in rent for a two-bedroom apartment in Mississauga, Ont. He predicts the changes will drive up home prices because demand for housing outstrips the inventory of property available to buy.
He said his main concern was that the new rules do not do much in terms of creating new supply: “What I need is low starter-home prices.”
The federal government’s main homebuilding program focuses on rental-only apartment buildings, not single-family homes or condos, which are individually owned.
Since the mortgage policy change announcement, realtors say they have already seen the market starting to heat up.
Nicki Skinner, a realtor with Bosley Real Estate Ltd. in Toronto, said she noticed the number of listings and showings have been quickly rising this week.
“Showings are through the roof,” she said, adding that, within minutes of a property being listed, there will be several showings booked.
The new rules go into effect Dec. 15, ahead of the historically busy spring selling season. After two years of stunted sales, the changes and cheaper mortgage rates may trigger buyers to rush back into the market. The last real estate boom took place during the pandemic, when interest rates were near 0 per cent.
“I worry that it’s going to be like the pandemic 2.0 where the interest rates are low and the financing rules have been relaxed, and it’s just going to be this party again where everyone’s going to be overbidding and places selling way over asking,” Ms. Babaran said.