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By Jordan Lavin, Ratehub.ca
Special to the Financial Independence Hub
For a little more than a decade, the Federal Government has been making policies that make it harder to buy your first home in Canada.
It’s hard to blame them. The great recession of 2008-09 was principally caused by a crash in the U.S. housing market which, in turn, had been caused by lax mortgage lending standards. Hundreds of thousands of people bought homes they couldn’t really afford, and were later foreclosed on or forced to sell. Left behind was a glut of housing inventory and an equal glut of people who had lost everything. The ripple effect was felt throughout the world, including here in Canada.
Fortunately, the mortgage problem was isolated to the United States. But the repercussions hit Canada hard, and interest rates fell to unprecedented lows as a response to the worsening economic situation. During the recovery, mortgage rates in Canada continued to fall and house prices quickly rose. In hot markets like Vancouver and Toronto, the average price of a home nearly doubled between 2010 and 2016.
All this left government officials on this side of the border wondering if it was possible for the mortgage and housing market to fail here. With the compounding worry of a housing market crash – what if prices went back down as quickly as they had gone up? – they began making new policies with the goal of making it more difficult for Canadians to qualify for a mortgage, especially if that mortgage were to be insured by the Canada Mortgage and Housing Corporation (CMHC).
Among the changes: Limiting amortization length for insured mortgages to 25 years; Limiting CHMC insurance to homes purchased for under $1-million only; Establishing a minimum down payment of 5% and then increasing the minimum for homes over $500,000; and expanding a “stress test” to eventually force all mortgage borrowers to qualify at a higher interest rate than they would actually pay.
This cocktail proved poisonous for first-time homebuyers. High house prices, harder qualification criteria and lower earning potential forced first-time homebuyers to get creative, finding new ways to afford homes.
Today, the government is looking at two new policy changes that could have an impact on first-time homebuyers.
A return to 30-year insured mortgages for first-time homebuyers
Currently, the longest you can take to pay back an insured mortgage (mortgage insurance is usually required when you have a down payment of less than 20%) is 25 years. But one policy change the government says they’re looking at is increasing that limit to 30 years.
This is a boon to affordability, at least at the qualification level. Ratehub’s mortgage payment calculator shows that the monthly payment on a $500,000 mortgage at today’s best rate of 3.29% will be $2,441 when amortized over 25 years, or $2,181 when amortized over 30 years. Since mortgage affordability is based on a fraction of your income, a lower payment equals a higher purchase price you can qualify for.
But there’s a significant downside. The obvious is the additional 5 years of mortgage payments later in life. If you’re over 35, signing a new 30-year mortgage could keep you making payments into retirement.
Less obvious is the extra interest cost. Someone with a $500,000 mortgage will pay over $50,000 more in interest with the 30-year option than someone who sticks to 25 years.
Easing the stress test
This is a less likely possibility, and it’s one that the opposition Conservatives say they’ll make an issue of in this fall’s election.
Currently, the stress test requires mortgage borrowers to qualify as if they’ll be paying a much higher interest rate than they actually are. This is designed to protect lenders from defaults as mortgage rates are expected to go up over the coming years. Theoretically, if you can afford to pay a 2% higher rate today, you should be in good shape if your mortgage rate goes up a few per cent on renewal. The downside to this is that it reduces the amount of money you can borrow for a mortgage.
The counter-argument to this is that first-time homebuyers are responsible and upwardly mobile. Young people buying their first homes can generally expect to see their incomes increase over their first 5-year mortgage term. There’s also an argument – although a flimsy one – that first-time homebuyers are circumventing the stress test by having older relatives co-sign or buy on their behalf.
If the stress test were eased or eliminated, it would theoretically increase your homebuying power overnight by allowing you to qualify at the contracted mortgage rate. However, this is not a near-term change. Even if the conservatives are elected this October, it could still take years for this to become reality.
Who’s advocating for change
Even if first-time homebuyers become allowed to take on 30-year insured mortgages, that doesn’t mean they should. These proposed changes are being most loudly advocated for by the Canadian Homebuilders’ Association, a group that represents the interests of the residential construction industry. Their primary interest is in creating more wealth for themselves by building more new homes – a goal that’s easier for them to achieve if first-time homebuyers are able to access more money. Once a home is completed, the builder gets the cash and all the risk resides in the newly-constructed dwelling with the buyer.
It’s transparently clear that these proposed changes aren’t meant to make it easier for first-time homebuyers to afford homes and live their best life. They’re proposed to make it easier for first-time homebuyers to spend more money on homes and benefit developers who specialize in using tape and glue to slap together as many soulless homes as they possibly can on a plot of land.
That’s not to say change isn’t needed for first-time homebuyers. It’s reasonable to want to own your own home, and the rules should be set up to support people who want to do that. But for the last decade, all the changes have been made to support and protect the people who profit from homebuyers. These proposed changes may make it easier for first-time homebuyers to spend more money on a home. It’s too bad they won’t make a first home easier to afford.
Jordan Lavin grew up on the coast of British Columbia, and moved to Toronto in 2004 to study radio and television at Ryerson University. After school, his part-time job at a local radio station quickly turned into a full-time marketing position at one of Canada’s leading sports broadcasters. Jordan developed a passion for personal finance while buying his first house, and his obsession with online mortgage calculators led him to Ratehub.ca. When he’s not at work, you’ll find him at a campground, at a curling rink, or relaxing at home with his family.
