First-time homebuyers can get 30-year mortgages to buy newly built houses under rule change

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Ottawa will allow first-time homebuyers to take out 30-year mortgages for newly built homes, relaxing rules as the federal government faces political pressure to ease the country’s housing crunch.

The longer amortization period, or amount of time allowed to pay down a mortgage, has been advocated by the real estate industry as a way to make mortgage payments more affordable as home prices have soared.

The change will apply to homebuyers who require mortgage insurance because they have made a down payment that is less than 20 per cent of the property’s purchase price. It will only be available for those purchasing a newly built home and not existing properties.

This is the first time in more than a decade that Ottawa has eased its mortgage rules, which have increasingly become tougher to protect banks from mortgage defaults and ensure homeowners can handle their debt loads.

Currently, borrowers with an insured mortgage are only allowed to take out a loan with a maximum 25-year amortization.

It is unclear how much the longer amortization period will help first-time homebuyers as it only applies to new builds, where buyers typically have to wait several years for the property to be constructed. Investors account for the vast majority of new build purchases.

“These are not incredibly material changes. My opinion is it’s mildly helpful,” said James Laird, president of Toronto mortgage lender CanWise Financial, who along with the rest of the real estate industry has been pushing for 30-year amortizations for insured mortgages for all types of homes, not just new builds.

Many developers require purchasers of new builds to make a deposit of 20 per cent of the property’s purchase price. And when a down payment is that size, the borrower does not have to get mortgage insurance and is already allowed to take out a loan with a 30-year amortization.

Regardless, the longer payment period may give first-time homebuyers an incentive to buy a new build. And that in turn could boost demand for preconstruction homes, which have fallen out of favour as borrowing costs have increased.

On Thursday, Ottawa said the change would “enable more young Canadians to afford a monthly mortgage payment” and “encourage new supply.” The rule change takes effect Aug. 1 and alters a decade-long policy of capping the maximum amortization period for an insured mortgage at 25 years.

Canada Mortgage and Housing Corp., the federal government’s mortgage insurer, has previously opposed a longer amortization period. Its former chief executive Romy Bowers has said that it could stoke demand and spur higher prices. A spokesperson for the agency directed questions on Thursday to the Finance Department, which made the announcement ahead of the federal budget on Tuesday.

Asked why the longer amortization does not apply to existing homes, Finance Minister spokesperson Katherine Cuplinskas said the federal government knows it needs to be careful in order to continue creating the economic conditions to allow interest rates to come down.

The Bank of Canada has said one of the biggest risks to inflation is that home prices could rise faster than expected. So far this year, home prices have started to slowly creep up but sales have been falling as prospective buyers wait for the central bank to start cutting interest rates.

The federal government’s announcement on Thursday is the latest in a series of announcements designed to show that it trying to deal with the country’s lack of affordable housing.

Other changes aimed at helping homebuyers and owners included allowing first-time homebuyers to withdraw up to $60,000 from their Registered Retirement Savings Plan without tax penalties to help with a down payment to buy a or build a home. The previous limit was $35,000.

The federal government also said Thursday it will allow some existing borrowers to permanently extend their amortization period so that they can reduce their monthly mortgage payment to a level they can afford.

With today’s higher interest rates, many borrowers have had to make significantly larger monthly payments. Borrowers with a variable-rate mortgage have had to immediately pay more interest every time the Bank of Canada raised its benchmark interest rate over the past two years.

Because the most common type of variable-rate mortgage product has fixed monthly payments, borrowers have seen their amortization periods blow past 35 years in order to keep the monthly payments steady. In some cases, the borrowers’ set monthly payments did not cover even the interest portion of the payment, so the size of their loan got bigger instead of smaller, which is known as negative amortization.

The federal government did not provide details on who would be eligible for permanent amortization relief except to say that borrowers would have to meet “specific eligibility criteria.”