For first-time home buyers, entering the housing market can feel like an impossible dream. Rising interest rates, sky high property prices, and ever increasing expenses, all have made homeownership unaffordable. But there’s big news that might just turn the tides.
The Canadian government recently announced a 30-year mortgage option for first-time buyers. As long as you have mortgage insurance …
Deputy Prime Minister Chrystia Freeland says the motive behind this change is to “restore generational fairness” for younger people who want to become homeowners. Let’s break down what this new policy means and how it can help become a homeowner soon.
Why a 30-Year Mortgage Option Matters for First-Time Buyers
This is the first time since 2008 that the government introduced a relaxed amortization period of 40 years. Since 2012, they tightened laws and brought the maximum period to 25 years. In the same year, new rules were introduced to reduce debt risk. Insured mortgages were limited to homes priced at $1 million or less, and stricter debt-ratio limits and refinancing restrictions changed mortgage standards nationwide.
The policy took effect on August 1st and was initially welcomed as a helpful option for first-time buyers. However, it has faced criticism for being too restrictive. In cities like Toronto and Vancouver, where the average price of new homes often exceeds $1 million, buyers can’t take advantage of the program.
Early data from Ratehub.ca’s lender, CanWise Financial, showed low interest in the program, with just three out of 290 applications opting for a 30-year mortgage by September 1st.
Therefore, on September 30, Canada Guaranty advised lenders to increase insured mortgages up to $1.5 million. There will be a 20 bps surcharge for these premium mortgages.
What Does This Change Mean for the Canadians?
The government’s goal here is twofold 1. support first-time buyers who need extra financial flexibility and 2. stimulate growth in the housing sector by encouraging new builds.
This shift will encourage more Canadians to buy their first home. It might increase short-term demand for single-family homes. For example, calculations by Ratehub.ca show that with a 30-year amortization at a 4.09% fixed five-year term, borrowers could save $303 per month ($2,895 vs. $3,198) on their mortgage payments compared to a 25-year term.
However, this extended term also means paying more interest over time and reducing the principal more slowly. In five years, a borrower on a 30-year term would have a mortgage balance $20,107 higher than one on a 25-year term. It is definitely a trade-off but when you can always pay more towards the principal amount later and reduce the term at renewal.
Will this increase property prices?
It will increase prices of single family homes in markets like Toronto and Vancouver but smaller markets like Barrie, Hamilton won’t see a big difference. According to the Canadian Real Estate Association, the drop in mortgage rate hasn’t sped up the real estate market. Buyers are still hoping rates drop to 1 – 1.5% like it was 10 cycles ago between March 2022 and July 2023. Further cuts are expected to drop to 2.75% by 2025, buyers will re-enter the market.
Will 30-year mortgages impact your home’s resale value?
No, it won’t have any impact on your home’s resale value. However, if there’s a lien on the property due to not paying the mortgage, then you’d see a negative impact.
5 Tips for First-Time Buyers Considering a 30-Year Mortgage
1. Set a Clear Budget
While lower monthly payments can make it easier to afford a home, remember to account for all ongoing costs beyond the mortgage itself. Factor in property taxes, homeowner’s insurance, maintenance, and unexpected repairs when setting a budget. Work with a mortgage advisor to understand how much mortgage you qualify for and terms of repayment.
2. Think Long-Term
A 30-year mortgage is a long-term commitment, which works well if you plan to stay in this home for several decades. With a longer period, you’ll build less equity if you sell before the repayment is done. There’s always an option to pay a lump sum amount down the road, so remember to add a no-penalty prepayment clause in your mortgage agreement.
3. Build an Emergency Fund
Before you enter the market, save 3 to 6 months of living expenses as a safety nut. It can be used as an emergency fund, fund for repairs and renovation, or directed towards the first few months of mortgage payment.
4. Shop for the Best Rates
The real estate market in Canada is slow right now, so don’t rush into buying the first house you like. Review any associated fees or penalties added to the mortgage term. Work with a mortgage broker to shop around multiple banks and lenders at the same time. You not only get discounts through a broker but also better terms and conditions.
5. Consider Prepayment Options
Prepayment amounts are monthly payments or periodic lump sums paid towards the mortgage principal. It’s a great idea to redirect tax refunds, HST/GST credits, OTB payments towards the principal amount in the first few years of homeownership. That way, you are not taking away from your spendings but also building equity faster.
Does the same rule apply to pre-construction properties in GTA?
Yes, the rule stays the same. However, builders refuse to cooperate to accommodate this new program. As a buyer, you are required to pay 15 to 20% in deposits within 6 months to a year of signing the purchase agreement.
We have some amazing pre-construction projects in GTA and Calgary valued at under $1 Million with flexible deposit payment options. Book a free consultation today.