The federal government’s relaxed mortgage rules unveiled this month will give first-time homebuyers a helping hand by lowering down payments and offering longer amortizations.
That’s good news for homebuyers. It could be even better news for banks, which stand to benefit from surging demand for bigger loans that take longer to pay off.
The changes, which take effect Dec. 15, will raise the price cap for insured mortgages to $1.5-million, up from $1-million previously. As well, all first-time homebuyers will be eligible for 30-year mortgage amortizations, up from 25-years.
Forget about mandatory 20 per cent minimum down payments on homes that cost more than $1-million.
In the details released this week, homebuyers can put down as little as 5 per cent on the first $500,000 of the purchase price. For the remaining portion up to $1.5-million, the minimum down payment is 10 per cent.
Previously, a homebuyer purchasing an average-priced home in Toronto for $1.2-million would have to come up with a down payment of $240,000. The changes will lower this minimum to $95,000, according to Rishi Sondhi, an economist at Toronto-Dominion Bank.
“The federal measures should help unlock powerful gains in Canadian sales and average home prices across Canada in the first half of 2025,” Mr. Sondhi said in a note this week.
That’s because pricier homes, often out of reach of younger homebuyers in urban areas, may become more accessible once the changes take effect. Declining interest rates, which lower borrowing costs, could add a significant tailwind.
There are a lot of moving parts here, from population growth to employment rates to housing supply, so it is still unclear whether these rule changes will succeed in helping would-be homeowners. One thing is clear though: The smaller the down payment, the bigger the loan.
“All told, mortgage rule tweaks will encourage already-levered households to borrow more, for longer,” Robert Kavcic, senior economist at BMO Capital Markets, said in a note.
For bank investors long rattled by rising borrowing costs, a precarious housing market and slow loan growth, that’s an encouraging development that could help bank stocks.
Though residential mortgages are among the lowest-margin loans offered by Canada’s largest banks because of their relatively low-risk nature, they account for a substantial 30 per cent to 40 per cent of their loan books. Canadian banks control about 75 per cent of the country’s mortgage market.
Trouble is, rising borrowing costs that followed the spike in inflation in 2022 have slowed home sales, weighing on this revenue-generating engines.
Canada’s Big Six banks reported in their most recent quarterly results that year-over-year residential mortgage growth, on average, was just 4 per cent, according to Gabriel Dechaine, an analyst at National Bank of Canada.
By comparison, the average credit card and commercial loan growth among the Big Six banks was far brisker over this period, increasing by 13 per cent in both cases.
Relaxed mortgage rules that invigorate home buying and raise demand for mortgages are bound to be good for lenders.
Robert Sedran, chief financial officer at Canadian Imperial Bank of Commerce, underscored the relationship between homebuyers and banks. “Their largest liability becomes our largest asset,” he said at the Barclays Global Financial Services Conference this month, before Ottawa announced the changes.
The question now is: How much optimism is already priced in to bank stocks?
Sluggish profits and simmering concerns about credit health and the economy weighed on the sector throughout much of 2022 and 2023 as the Bank of Canada and the U.S. Federal Reserve raised their key interest rates in an epic battle with inflation.
Over a 21-month period, bank stocks declined more than 30 per cent, on average.
Since late October, though, bank stocks have rebounded 39 per cent. They have outperformed the S&P/TSX Composite Index by 13 percentage points over the same period as inflation subsided and economists grew more confident that a U.S. recession could be averted.
CIBC (CM-T), the big bank most exposed to the housing market owing to the large share of mortgages on its balance sheet, has rebounded 74 per cent from its 2023 low. The stock hit a record high this week.
Still, the rally in Canadian bank stocks appears largely related to subsiding inflation, which has spurred rate cuts and the hope that lower borrowing costs will ease the burden on indebted consumers.
Ottawa’s fresh approach to mortgage rules is something else: If it encourages more homebuying, investors will have compelling new reason to stick with the banks.