Under the new mortgage rules, which take effect Dec. 15, the price cap for insured mortgages will be $1.5-million, up from $1-million.DARRYL DYCK/The Canadian Press
On Sept. 23, reporters Rachelle Younglai and Erica Alini answered readers’ questions about the impact of Canada’s new mortgage rules on housing supply, inflation, the rental market and young buyers who are entering the real estate market.
Starting on Dec. 15, the price cap for insured mortgages will be $1.5-million, up from $1-million. First-time homebuyers will be allowed to take out an insured mortgage with a 30-year amortization for all types of homes. And more buyers will be allowed to take out an insured mortgage with a 30-year amortization on a preconstruction home. Not all investors are eligible.
The rules are aimed to make buying a home more attainable for young Canadians, and have already attracted droves of potential buyers, interested in finding out if they’re able to save money on a home purchase.
Here are some highlights from the Q&A. Questions and answers have been edited for clarity.
Increasing affordability
What young people can possibly afford mortgages in the million-dollar range? Are the new rules just “smoke and mirrors” or an opportunity for young Canadians?
Rachelle Younglai: Not many young, individual Canadians would be able to afford a mortgage in the $1-million range. Banks and other lenders typically will lend about four times your income. That means you would need a household income that is roughly $250,000 per year to qualify for a mortgage in that range.
But I don’t think the new rules are just “smoke and mirrors.” The 30-year amortization can make a difference in terms of your monthly mortgage payment. All first-time homebuyers will be allowed to take out an insured mortgage with a 30-year amortization starting Dec. 15. Some lenders have calculated that your monthly mortgage payments could be about 10-per-cent lower under the 30-year amortization versus the 25 years if your purchase price is closer to the nation’s average home price of $650,000.
But keep in mind that if you take out a 30-year mortgage, that you will be paying more in interest overall versus the 25-year mortgage. Basically, the 30-year amortization would make it slightly easier to pay your monthly payments, but you would be holding your debt for longer and would pay more interest overall.
Many Globe readers said that they were worried the new rules would increase home prices and make housing more unaffordable. What will the impact look like?
Erica Alini: That is a widespread and legitimate concern. My colleague Rachelle Younglai has reported on how real estate agents and mortgage brokers say they’ve immediately been inundated with inquiries from prospective buyers as soon as the new rules were announced. It’s a pretty safe best to say that the rules – along with falling interest rates – will drive up sales volumes across the country.
But what this will mean for home prices is less straightforward. One economist I spoke to said he expected prices to rise more quickly in markets that are already quite strong, such as Calgary, Halifax and Moncton. In Vancouver and Toronto, he expected a more moderate impact on prices, especially in the first half of the year.
Keep in mind that Toronto especially has a big inventory of unsold condos – that should help moderate upward pressure on prices, that economist said. Another factor that could moderate a new escalation in home prices is higher unemployment and a weaker job market in general. Despite lower rates and more relaxed mortgage rules, concerns about job security might keep some buyers on the sidelines.
Why would buyers be interested in a 30-year mortgage if it increases their debt?
Alini: The new rules essentially present a tradeoff for buyers: Get into the housing market with a smaller down payment and/or smaller monthly payments, but (likely) pay more interest over the life of the mortgage. Some buyers who may be currently stuck facing exorbitant rents for housing that does not satisfy their long-term needs – or who would only be able to buy a condo under the current rules but would rather buy a townhouse, semi-detached or detached home – may find that to be an okay tradeoff.
Keep in mind also that buyers have can always pay off their mortgage more aggressively if their financial situation improves and therefore save on interest. Just because you sign up for a 30-year mortgage doesn’t mean it will take you 30 years to pay it off.
Addressing Canada’s other housing issues
Many Globe readers commented that Canada has a housing “supply” problem – and not as big a “demand” problem. Will these new rules address the supply issues?
Younglai: The new rules do not address the supply issues. The new rules mostly support the demand side by: A) allowing first-time homebuyers to stretch out their mortgage over 30 years instead of 25 years; and B) allowing homebuyers to put down a smaller deposit on a home up to $1.5-million. The federal government also said more buyers are eligible to take out a 30-year insured mortgage for a preconstruction home or a home that has not yet been built. That could help create more demand for preconstruction homes, which means more homes will eventually be built.
But currently, many builders already require that buyers make a 20-per-cent down payment on a preconstruction home, and with 20-per-cent down, you do not need mortgage insurance and you already qualify for a 30-year mortgage. This mortgage could help developers sell the remainder of their inventory as they are nearing the completion of the building, but overall, this policy will not have much of an impact on new supply.
Could Canadians expect to see changes in the rental market as a result of these new mortgage rules?
Younglai: It could have an impact on the rental market if the new mortgage policies spur more renters to get into the real estate market and buy a property to live in. If that happens, that could free up rental units and reduce demand for rentals. But at the same time, there are many other forces at play that would keep demand for rentals steady. One of them being that our population is still growing mostly through immigration and newcomers need a place to live.
The effects on Canada’s overall economy
What could the new mortgage rules spell for inflation down the line?
Alini: One worry is that the new rules – along with falling interest rates – could light up a fire under the housing market one again. A significant and widespread rise in home prices could, in turn, put upward pressure on inflation as shelter costs are part of the Consumer Price Index. At the same time, mortgage rates also factor into the CPI, and the fact that rates are falling is helping to lessen the pressure on inflation.
To be clear, many current homeowners who secured exceptionally low interest rates in 2020 and 2021 will still be renewing their mortgage this year and in 2025 at higher rates, which drives up shelter costs. But because mortgage rates on new loans are falling, those homeowners likely won’t face as much of a financial shock at renewal as economists initially feared. Overall, analysts aren’t expressing much concern about the impact of the new mortgage rules on inflation.
Getting into the housing market?
What will the down-payment percentage look like for mortgages valued over the $1-million mark? And do we know when the insurers and lenders will have more information about how this will be implemented?
Younglai: Currently, we don’t know what the new down-payment percentage requirements will be to take out an insured mortgage on a home that is priced between $1-million and $1.5-million. When the federal Finance Department made the announcement last week, they said the new rules would be coming in a few weeks and ahead of Dec. 15 when the rules go into effect. So based on that language, I would guess that the down-payment requirements could be available by mid-October.
Do reputable economists see this as positive for lower- and middle-class Canadians?
Alini: There is no doubt that the rules, as they have been presented so far, will allow borrowers to take on larger mortgage debts and to pay them off over a longer period of time. That means homebuyers will also be taking on larger interest costs on that debt.
That said, the rules will also help shrink mortgage payments for homebuyers and/or allow them to buy a starter home with a smaller down payment. Some people may be okay with that overall tradeoff. And at least one economist I’m aware of argues that by reviving home sales the rules will also help revive home construction, especially in Toronto, where it has dropped dramatically, which should help improve affordability in the long term.