What new mortgage rules mean to homebuyers, banks, real estate

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This week, the federal government announced much broader changes to mortgage amortizations and insurance rules than indicated in the spring budget, calling them “the most significant mortgage reforms in decades.” Here’s a look at what those changes are and what they might mean for borrowers, lenders, builders, and insurers.

What are the changes?

Ottawa is introducing 30-year amortization periods for all first-time homebuyers and all buyers of new builds, regardless of whether it is their first home. This goes far beyond the longer amortization periods introduced in August that applied only to first-time homebuyers of new builds including condominiums. At the same time, effective Dec. 15, 2024, the government expanded mortgage insurance qualification to cover houses that cost more than $1 million, up to $1.5 million. 

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Why were the changes made?

Faced with a housing shortage and an affordability crisis, the government is aiming to make it easier for younger buyers to get into the market as it attempts to boost supply by around four million homes. The government also seemed to take into account that the average house price in Canadian cities such as Toronto and Vancouver is now over $1 million, which wasn’t the case in 2012 when that was the cap put on mortgages to qualify to be insured. The national average home price in August 2024 was $649,100, according to Canadian Real Estate Association (CREA). Some more cynical observers view the expanded changes as an attempt by the minority Liberal government, which recently lost a support agreement with the NDP, to curry favour with voters.

What will they mean for homebuyers?

At at time when interest rates are coming down and providing some relief to homebuyers, the new rules mean paying for a house will be stretched across more years, reducing the monthly cost. The mortgage industry has been calling for longer amortizations, saying it would be a concrete measure to improve affordability by helping homebuyers meet borrower stress tests on managing mortgage payments. “The ability to spread payments over a longer time period will help with borrowers’ qualification ratios, which in turn will help them pass the mortgage stress test, particularly in markets where home prices remain above the million-dollar threshold,” said  Penelope Graham, a mortgage specialist at Ratehub.ca.

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In addition, the new cap on the value of homes that qualify for insurance means anyone buying a home that costs between $1 million and $1.5 million will no longer need a 20 per cent downpayment. They will now qualify for an insured mortgage, which typically requires a downpayment of only five per cent. Graham said the amortization measure first introduced in August for newly-built homes was criticized as too restrictive because many were priced above the threshold for an insured mortgage. “Expanding this measure to all housing types, as well as allowing up to $1.5 million for insured mortgages, will greatly improve first-time home buyers’ access to the housing market, and for housing types beyond the traditional starter-home condo, as buyers can now buy more expensive home types with smaller down payments,” she said.

What will the impact be on monthly payments?

A buyer financing a home at the average Canadian price of $649,096 over 30 years at 4.09 per cent interest would have monthly payments of $2,895 instead of $3,198 with a 25-year mortgage, according to rates.ca. Over five years, they would pay $18,172 less with the 30-year amortization. Their balance owing on the end of five years (when they would need to renew) would be $545, 249 — $20,107 more than if they had amortized over 25 years. 

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Is there a downside?

Homebuyers will be carrying mortgage payments longer. For instance, a 37-year-old who amortizes a mortgage over 30 years will still be paying it down past the traditional retirement age. Moreover, homebuyers may be tempted to spend more than they can afford because the monthly payments will be cheaper than they were under the old rules. Mortgagees will also pay interest for longer, though that tends to make up a smaller proportion of monthly payments in the later years of a mortgage. The changes could also lead to an uptick in home prices by stimulating demand, exacerbating the supply issues that the measures are trying to alleviate, said Robert Colangelo, a vice president in the Financial Institutions Group at Moody’s Canada Inc. This would be ill-timed with unemployment — a key indicator of mortgage defaults — creeping higher than expected, he said.

What do the changes mean for lenders and the CMHC?

If borrowers buy more homes as a result of the new rules, the banks may have to review their underwriting standards to make sure they don’t qualify buyers for homes they can’t afford, leading to defaults. The changes will also shift the balance of risk between lenders and insurers that are backstopped by government. Since 2012, when insured mortgages were capped at $1 million, the proportion of insured mortgages in bank portfolios has dropped to around 20 per cent from 47 per cent, said Colangelo. If the new measures lead to many more mortgages being underwritten on homes with values between $1 million and $1.5 million, “that shifts the risk from the banks’ balance sheets to the federal government, given that they guarantee 100 per cent of the CMHC (insured mortgages).” He added that the federal government also backstops up to 90 per cent of the mortgages insured by the private players. “From a bank perspective, that’s mildly credit positive,” Colangelo said.

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What will this do for the real estate market?

Both changes announced by the federal government this week could lead to increased home sales, which had stalled, and higher prices, which were coming down a bit this year, according to industry sources. Karen Yolevski, chief operating officer of Royal LePage, said the changes, combined with lower interest rates, will allow some prospective homeowners to get off the sidelines and into a home. “We know we’ve got… buyers on the sidelines right now who certainly want to own a home. They simply cannot afford either the down payment or the monthly payments at current interest rates,” she said, adding that it “remains to be seen” whether renewed buyer competition pushes prices to the point where, even with these new rules, homes become out of reach. “We’re sitting in a good position right now where we have more inventory on the market than we have seen in decades,” she said. Mortgage specialist Rob McLister, who publishes his views on MortgageLogic.news, was more convinced the impact could lead to more expensive homes, calling the new government policy “almost pure price stimulus.”

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What about the condo market? 

Colangelo, at Moody’s, said it’s possible that the longer amortization on new construction could reignite demand for presale condos, given that it would lower mortgage payments. However, he said this could be offset by lower demand for rentals in light of recent measures announced for first-time home buyers. Moreover, he said, there has been a trend towards smaller square-footage condos that has been largely shunned by both renters and buyers.

What will this mean for real estate investors? 

Unlike ultra-low interest rates, the new mortgage amortization and insurance rules aren’t expected to spur investment activity in residential real estate, said Colangelo. Investor mortgages represent, on average, about nine or 10 per cent of the total residential mortgage portfolios of the large Canadian banks, “so I would not anticipate these measures to drastically change this proportion over the medium-term,” he said. Speculators will be kept to a subset of homebuyers because they can only take advantage of the amortization rules that apply to new builds, and there may yet be caveats that prohibit the rules from applying to buyers with more than one property, said Yolevski. “These are positive (steps) because they do not, by and large, help drive speculation,” she said. “You might see some speculation in new construction… But you’re talking about a small segment of the market that may be able to take advantage.” 

• Email: bshecter@postmedia.com

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