The federal government is looking to make home-buying more affordable for millennials – and one potential solution would have a noticeable impact on mortgage payments.
Finance Minister Bill Morneau said in January there are “multiple things we’re looking at in order to think about how we can help in that regard,” referring to home-affordability issues for young Canadians. He did not float any concrete policy options.
However, The Globe and Mail’s Bill Curry reported on Wednesday that Ottawa appears to be considering a move that would allow first-time homebuyers to obtain 30-year insured mortgages, up from the current 25-year limit. The Canadian Home Builders’ Association has discussed policy changes in recent meetings with officials in the Prime Minister’s Office and Mr. Morneau’s office.
Association spokesman David Foster said government officials showed particular interest in the 30-year amortization proposal, according to the report.
No doubt, such a policy change would make monthly mortgage payments less onerous. By how much? The Globe asked rate-comparison website Ratehub.ca to crunch some numbers.
First, we wanted to see monthly mortgage payments for homes at three price points:
- $472,000: roughly the national average home price in December, according to the Canadian Real Estate Association;
- $375,000: roughly the national average home price in December, after excluding Greater Vancouver and the Greater Toronto Area;
- $750,180: the average home price in the Greater Toronto Area in December, according to the Toronto Real Estate Board.
Then, we wanted to account for three levels of down payment. For the two cheaper price points, that included down payments of 5 per cent, 10 per cent and 15 per cent. For the highest price, the minimum down payment is about 6.7 per cent, due to rules for homes that are between $500,000 and $1-million. Down payments of 10 per cent and 15 per cent were also used.
All scenarios assume a five-year fixed mortgage rate of 3.74 per cent, a common rate on offer by Canada’s big banks.
Here’s how the results shook out.
For the $375,000 home, mortgage payments differed from the current 25-year maximum on insured mortgages by about $168 to $189 a month with a 30-year amortization.
For the $472,000 home, mortgage payments differed by about $211 to $239 a month.
For the $750,180 home, mortgage payments differed by about $335 to $372 a month.
Note that these results include monthly default-insurance payments, which add thousands of dollars in costs over the lifetime of the mortgage.
Of course, there are drawbacks to the 30-year amortization plan – notably, that total interest paid will be greater than with a shorter runway.
Thirty-year amortization periods are currently available to uninsured buyers, or those who make a down payment of at least 20 per cent of the purchase price. The Conservative government in 2012 lowered the limit for insured buyers, or those who make a down payment of less than 20 per cent, to 25 years from 30.
Since the fall of 2016, insured buyers have also been subject to a stress test on their ability to finance mortgage payments at higher interest rates. A similar test on uninsured buyers went into effect in January, 2018.
In theory, lower mortgage payments would make the stress test less onerous for some buyers, allowing them to finance pricier homes than they could otherwise afford with a shorter time frame.