First-time homebuyers can now apply for 30-year mortgages as part of a new policy introduced in the 2024 federal budget. The initiative, which kicks off on Thursday, aims to help younger Canadians break into the housing market by giving them more time to pay off insured mortgages on newly built homes. However, the policy has sparked a debate about its effectiveness and potential drawbacks.
Who Qualifies?
The extended 30-year mortgages are available to:
- First-time homebuyers.
- Buyers of newly built homes with no previous residents.
- Individuals who haven’t lived in a home owned by a current spouse or common-law partner, unless they’ve recently ended the relationship.
- Buyers with high-ratio mortgages, where the loan exceeds 80% of the home’s purchase price.
To qualify for an insured mortgage, the home must be under $1 million, and the buyer must put down less than 20% of the purchase price.
Pros and Cons
Pros:
- Lower Monthly Payments: The primary benefit is smaller monthly payments, making it easier for buyers to afford homes and qualify for larger mortgages.
- Short-Term Financial Relief: More disposable income each month can help buyers manage other expenses.
Cons:
- Higher Long-Term Costs: Extending the mortgage period means paying more interest over the life of the loan. An RBC analysis showed that a $150,000 mortgage over 30 years would reduce monthly payments by just over $75 compared to a 25-year term but would result in over $20,000 in additional interest.
- Limited Applicability: The policy applies only to new builds under $1 million, which may exclude many potential buyers in high-cost markets like Toronto and Vancouver. Condos and homes in less expensive areas are more likely to qualify.
Regional Impact
The effectiveness of the new policy varies by region. In the Prairies and Atlantic Canada, where home prices are generally lower, more buyers may benefit. However, in Ontario, British Columbia, and parts of Quebec, the high cost of housing limits the policy’s applicability.
Additional Costs and Considerations
- Insurance Premiums: The Canada Mortgage Housing Corporation will charge a 0.2% insurance premium for those using the extended mortgage term.
- Developer Deposits: Many builders of new homes require a 15-20% deposit upfront, which could be a significant hurdle for young buyers.
Mortgage experts like Penelope Graham from RateHub.ca and Toronto mortgage broker Ron Butler are cautious about the policy’s overall impact. While it provides short-term relief, the long-term financial implications and the limited scope mean it may not significantly increase homeownership rates among young Canadians.
As the policy rolls out, it remains to be seen how many first-time buyers will take advantage of the new 30-year mortgage and whether it will effectively address housing affordability challenges.
