New mortgage rules will ease down payment, cashflow hurdles for homebuyers - but there’s a catch

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New federal rules would help homebuyers access lower mortgage rates for pricier properties and pay smaller instalments over a longer time period, but the changes would also allow borrowers to take on more debt and pay more interest on it.

Under the coming regime, set to take effect Dec. 15, buyers will be able to get a mortgage with default insurance – which is mandatory for those with less than 80 per cent of equity in their home – for properties worth as much as $1.5-million, up from a cap of $1-million.

The federal government, which announced the new rules Monday, will also allow first-time homebuyers to take a maximum of 30 years to repay an insured mortgage on any type of home. And more buyers will have access to 30-year mortgages if they are buying a newly built home. Until recently, buyers with less than 20-per-cent down could take a maximum of 25 years to repay their debt.

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While the new rules will make it easier for first-time buyers to purchase a home, they could pay tens of thousands of dollars more in interest if they take out bigger mortgages and take longer to pay them off, according to Penelope Graham, a mortgage expert at financial products comparisons site Ratehub.ca.

“This is an important caveat that should be taken into consideration by anyone weighing their payment options,” Ms. Graham said in an e-mail.

Consider a buyer who purchases a property worth $649,096 – equivalent to the average home price in Canada as of August – with a 10-per-cent down payment, which would require mortgage insurance. Today, this buyer would have to take a mortgage with an amortization – the time it takes to pay the mortgage – no longer than 25 years in most cases. (At the start of August, new measures came into effect allowing 30-year insured mortgage amortizations for first-time homebuyers purchasing newly built homes.)

With a competitive 4.09-per-cent, five-year fixed rate, their monthly payment would be $3,198, according to calculations provided by Ratehub. If the same borrower was able to sign up for a 30-year amortization, their payment would shrink to $2,895, or $303-a-month lower.

But by taking longer to hack at their mortgage, they’d be paying more in interest.

For simplicity, let’s assume this homeowner sticks with the same interest rate throughout the life of their mortgage. (In real life, their rate would likely change every few years when their mortgage comes up for renewal.) With a 30-year amortization, the interest charges would add up to $439,827, or nearly $83,000 more than if they’d chosen a 25-year mortgage.

Now let’s look at a first-time homebuyer eyeing a $1,082,000 home, equivalent to the average home price in Toronto. Currently, they would need 20-per-cent down both to qualify for a mortgage at this price and, except in the case of a newly built home, be able to stretch their amortization to 30 years.

According to Ratehub, the mortgage reforms could allow this borrower to qualify for a 30-year mortgage with a down payment potentially as low as 7.69 per cent, assuming current rules on minimum equity requirements will apply when the new policy takes effect.

In this scenario, their minimum down payment would drop from $216,440 to a much lower $83,220.

The monthly mortgage payment, on the other hand, would remain roughly the same. This reflects the assumption that, under the new rules, the borrower would have have to pay for mortgage insurance but also be able to access so-called insured mortgage rates. Such rates are typically lower than those lenders offer on loans that don’t require insurance against the risk of borrowers defaulting on their payments.

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But taking five years longer to pay off a significantly larger mortgage would cost the borrower nearly $145,000 more in interest, the Ratehub calculations show. Still, the new rules mean buyers will no longer have to pony up a minimum of 20-per-cent down for homes priced between $1-million and up to $1.5-million, as is currently the case.

“The ability for first-time home buyers to now take out insured mortgages and make minimum down payments on homes priced above $1-million will open up additional home type options for this group,” Ms. Graham said.

Under the current rules, many young buyers are limited to purchasing condos in the country’s priciest markets because they can’t save for a 20-per-cent down payment on a home worth $1-million or more, she added.

Editor’s note: An earlier version of this article incorrectly stated that all homebuyers, including investors, will be eligible to take out an insured mortgage with a 30-year amortization to buy a preconstruction home. Investment purchases of income properties are not eligible. This version has been updated.