5 advantages + 6 disadvantages to recent mortgage changes

5 benefits of the recent mortgage changes

1. Increased homeownership accessibility

The government's decision to raise the cap on insured mortgages from $1 million to $1.5 million will allow more Canadians to qualify for loans with lower down payments — in some cases, as little as 5%.

The cap increase on insured mortgages will benefit people across Canada; it’s particularly helpful to buyers in high-cost urban areas like Vancouver and Toronto — just don’t expect a rush on single-family detached (SFD) homes. As of August 2024, the average prices for an SFD were more than $2 million and $1.3 million, respectively.

Still, the higher cap limit will help more buyers enter into homeownership, particularly buyers with less than 20% saved as a down payment.

2. Option for 30-year mortgage helps ease monthly payments

The re-introduction of a 30-year mortgage amortization period, available to first-time buyers and those purchasing newly built homes, will help with affordability since it enables home buyers to get into the property market while helping to lower monthly mortgage payments.

The theory is a longer repayment period allows buyers to spread the cost of purchasing the home over a greater timeframe. This makes home loan debt repayment more manageable. (There are arguments that this is particularly advantageous to younger home buyers, whose earnings may still need to grow but want to get into the property market.)

3. Encouragement for new home construction

By extending the 30-year amortization period to buyers of newly constructed homes, the government hopes to stimulate new housing development. This could help alleviate the long-term housing supply issues by incentivizing builders and developers to increase construction projects, particularly in underbuilt regions.

4. Enhanced competition among lenders

A critical change is the removal of the stress test when renewing a mortgage.

Now, homeowners with insured mortgages can complete a mortgage renewal and switch lenders without having to use the federal mortgage stress test to qualify for one.

This change helps both homeowner flexibility as well as healthy lender competition. By removing the need to re-qualify a borrower using the stress test, the homeowner can shop around for a better mortgage rate. (For homeowners with stretched budgets, this change helps reduce the stress and fear of being locked into unfavourable terms with their current lender.)

5. Boost to economic activity

These mortgage changes are expected to spur economic activity by increasing demand for homes, especially in markets where new housing developments are in progress.

Based on experience, we know that more real estate transactions benefit sectors related to housing, such as construction, real estate services and home improvements — and this economic boost helps the economy.

For instance, in 2023, residential real estate accounted for 10% to 20% of the nation’s gross domestic product (GDP), the economic measure of the monetary value of final goods and services produced in Canada. In 2021, commercial real estate added roughly $148.4 billion to the economy and created more than a million jobs, making it comparable in size to Canada’s oil and gas sector.

Empower your investments with Qtrade

Discover Qtrade's award-winning platform and take control of your financial future. With user-friendly tools, expert insights, and low fees, investing has never been easier.

Start Trading Today

6 concerns with these “significant mortgage reforms”

1. Increased demand without addressing supply

The biggest concern about the recent mortgage rule changes is that these regulatory changes focus on the demand side of the housing equation and do little to resolve the ongoing lack of housing supply.

Now, by raising the cap on insured mortgages and extending amortization periods, more people can afford to get into the housing market, but the number of available homes has not increased. The imbalance — more demand with no change to supply — could lead to further price inflation, especially in already overheated markets like Vancouver and Toronto.

New housing construction may help to meet demand, but not in the short term.

2. Risk of price inflation

Increasing the mortgage insurance cap to $1.5 million will allow more people to purchase homes with smaller down payments, which could further accelerate price growth, making homes less affordable for a broader range of Canadians.

As more buyers enter the market, the competition for limited housing could drive prices even higher, especially in urban centers where home prices are already well above the national average.

3. Affordability crisis may worsen

While the goal of the policy is to make homeownership more attainable, there are justifiable arguments that these new measures may actually worsen the housing affordability crisis.

With more buyers qualifying for larger mortgages, home prices could rise faster than incomes, putting more pressure on middle-income Canadians and first-time buyers. This could create a situation where even though more people qualify for mortgages, fewer Canadians can actually afford homes in high-demand areas.

4. Interest rate sensitivity

Canadian mortgages typically renew every three or five years, meaning homeowners are more vulnerable to rising interest rates. As interest rates fluctuate, new buyers taking out larger mortgages may face significant financial strain when their mortgage renews — potentially leading to higher rates of delinquency or a curb in spending (as people spend more of their disposable income on housing-related costs). While these recent mortgage changes help with short-term access to the housing market, it does nothing to address the risks of variable interest rates in the long term.

5. Limited impact on affordable housing

The federal government announced these changes with a directive that these new measures will help with housing affordability. However, these updates favour middle to upper-middle-income earners — those capable of finding and saving disposable income for a down payment on a home. These changes do not help Canadians seeking affordable housing — either to own or as a stable, secure lifetime rental.

To substantively address housing affordability, all three levels of government will need to develop and update initiatives to help with housing supply, such as aggressive zoning reforms, reshaping the process of construction and permits as well as incentives for affordable housing construction and purpose-built rentals.

6. Regional disparities

The impact of these changes may vary significantly by region. In markets like Toronto and Vancouver, where home prices already exceed $1.5 million, the increased mortgage insurance cap may provide only marginal relief. Conversely, in smaller or less expensive markets, these changes could lead to faster price growth and reduced affordability.

Supply constraints could mute the benefits of these mortgage changes

The Canadian government has acknowledged that housing supply remains a core issue, with a goal to build nearly four million new homes to meet the growing demand. However, construction in major urban centers like Vancouver and Toronto faces significant regulatory and logistical challenges. Even with increased mortgage flexibility, the lack of available housing could limit the effectiveness of these reforms in addressing affordability in the short term.

While these new mortgage rule changes aim to make homeownership more accessible, they could lead to unintended consequences, including price inflation, greater financial risk and continued challenges in addressing the supply side of the housing market.

On the flip side, these mortgage rule changes offer several benefits, including expanded access to homeownership, particularly in high-cost areas, and relief through longer amortization periods. They also encourage competition among lenders and could stimulate much-needed housing supply, especially in underbuilt regions.

To help, here’s a breakdown of who benefits from the recent mortgage changes and why.

Unexpected vet bills don’t have to break the bank

Life with pets is unpredictable, but there are ways to prepare for the unexpected.

Fetch Insurance offers coverage for treatment of accidents, illnesses, prescriptions drugs, emergency care and more.

Plus, their optional wellness plan covers things like routine vet trips, grooming and training costs, if you want to give your pet the all-star treatment while you protect your bank account.

Get A Quote

Who benefits from the recent mortgage changes?

Here’s how Canadians will benefit from the recent mortgage changes.

First-time home buyers will benefit from these recent mortgage changes

The reforms particularly focus on first-time buyers. The increase in the insured mortgage cap and the 30-year amortization term provide new buyers more opportunities to enter the market, even in expensive cities. Coupled with the government’s enhanced Tax-Free First Home Savings Account and changes to the Home Buyers’ Plan, first-time buyers are better equipped to secure financing and save for down payments.

• Incentives for first-time buyers: In addition to the 30-year mortgage option, the government has enhanced the Tax-Free First Home Savings Account and raised the Home Buyers’ Plan limit, helping first-timers save more effectively for a down payment.
• Easier qualification: The increase in the mortgage insurance cap allows more first-time buyers to qualify for homes that previously would have been out of reach due to pricing.

Moving-up or downsizing buyers will benefit from these recent mortgage changes

• Longer mortgage terms: The 30-year amortization option offers more manageable monthly payments, making homeownership more accessible to those entering the market for the first time.
• Larger mortgage availability: With the cap increase to $1.5 million, new buyers, especially in high-priced cities, can secure financing for costlier homes with lower down payments.

Home sellers will benefit from these recent mortgage changes

• Increased buyer pool: The raised cap on insured mortgages and the longer amortization terms can increase potential buyers for higher-priced homes, particularly in urban markets. Sellers might benefit from a larger market, driving faster sales or better prices.

Real estate investors will benefit from these recent mortgage changes

• More flexibility in mortgages: Investors in newly constructed homes can take advantage of the 30-year amortization, improving their cash flow with lower monthly payments. However, the market for investment properties may remain competitive due to supply constraints.

Canadians need to prepare for more of the same

According to Freeland, these changes are part of a broader government strategy to tackle housing shortages while making homeownership more attainable for a wider range of Canadians.

Before the recent changes, home buyers were struggling. A decade of low rates, followed by a quick ramp-up of interest rates (to combat inflation), combined with lending restrictions and low housing supply, meant that housing was, and still is, unaffordable in many parts of Canada.

However, these recent mortgage changes mean that first-time home buyers, those looking to upsize, home sellers and even real estate investors should find it a bit easier to get into the property market — but not necessarily cheaper.

Sources

1. Better Dwelling: Canada’s Economy Hits A New Record For Dependency On Real Estate Investment (Sept 6, 2021)

1. NAIOP: Report Examines Economic Contributions of Commercial Real Estate in Canada (Winter 2022/2023)