Canada launches 30-year mortgage loans, benefiting first-time homebuyers
Some people in Canada who want to buy a house can now obtain a 30-year mortgage, which is a new measure taken by the Liberal government to make buying a house more affordable.
According to Global News, experts suggest that the new policy may increase the borrowing capacity of some homebuyers, but overall its impact on housing affordability is limited.
Starting from August 1st, the repayment period for some first-time homebuyers, which is the time to fully repay the loan, has been extended from the Canadian standard of 25 years to 30 years.
For people who cannot afford monthly mortgage payments, extending the repayment period will help reduce the monthly repayment amount.
Finance Minister and Deputy Prime Minister Chrystia Freeland announced these changes in the 2024 federal budget released in April. She told reporters this week that the change that came into effect on Thursday is one of a series of measures to improve Canadians' housing affordability.
This means that the monthly repayment amount will decrease, so more young Canadians can afford their mortgages. This is just one of several measures taken by our government to help young Canadians save for down payments and purchase homes, "she said.
Prime Minister Trudeau also tweeted recently, stating that "if you have a longer mortgage term, you can reduce monthly payments, which means you can buy your first home earlier. Starting from August 1st, more first-time homebuyers will have this option. “
Victor Tran, a mortgage and real estate expert at Ratesdotca, said that extending the mortgage term by five years could increase the borrowing ability of homebuyers by about 5%, making it possible for them to obtain more loans.
BMO Senior Economist Robert Kavcic stated that extending loan terms is equivalent to lowering mortgage rates by 75-80 basis points.
For those who receive this service, from a monthly repayment perspective, this is a very meaningful change, "he warned," but only for those who can actually access this service
Kavcic and Tran stated that certain conditions need to be met in order to obtain a 30-year mortgage loan, which would reduce the actual number of beneficiaries.
Image source: Global News
Who is eligible for a 30-year mortgage loan?
At least one borrower must meet the Canadian government's definition of a first-time homebuyer in order to obtain a 30-year mortgage loan from a lender. The government has listed several criteria for identifying as first-time homebuyers, including: having never purchased a property and not residing in a house owned by oneself or one's spouse within the past four years.
In addition, the house must be newly built and unoccupied.
Finally, the 30-year repayment plan is only applicable to insured mortgage loans. Mortgage loans can only be insured when the down payment of the buyer is less than 20% of the total price of the house and the purchase price of the house is less than 1 million yuan.
Tran stated that obtaining an insured mortgage loan for a new home may be a barrier for the most expensive market buyers to access a 30-year repayment plan.
In Toronto or Vancouver, many properties, even at the entry-level level, have already exceeded $1 million, making it impossible for insurance companies like the Canadian Mortgage and Housing Corporation (CMHC) to provide mortgage insurance for them.
Tran added that many builders of pre built homes require a minimum down payment of 20% as they need early cash flow to initiate construction. This also makes it impossible for newly built houses to obtain insured mortgage loans.
Actually, there aren't that many people nationwide who can take advantage of this new plan, "Tran said.
Kavcic stated that many Canadian families currently seeking housing will not be able to benefit from the new policy of extending repayment terms.
They are either existing homeowners who want to increase their housing area and lose their eligibility as first-time homebuyers; Either renters who wish to purchase more bedrooms may face properties worth over a million yuan in big cities.
Ultimately, this only affects a very small portion of the homebuyer population, "he said.
Is a 30-year mortgage more affordable?
Critics of the 30-year repayment plan also question whether it truly improves the market's affordability.
Tran pointed out that by choosing to extend the repayment period, CMHC will add an "insurance surcharge" equivalent to 20 basis points on top of the existing mortgage insurance premium. In Ontario, it is also necessary to pay insurance surcharges when purchasing a house, which increases the transaction cost of buying a house.
Taking a first-time homebuyer with an annual income of 100000 yuan as an example, Tran calculates the situation of purchasing a house worth 405000 yuan with a 5-year fixed interest rate mortgage loan of 5.0% and a minimum down payment of 5%.
During the 25 year repayment period, the monthly repayment amount is CAD 2327.
Extending to 30 years later, based on increased borrowing capacity, insurance surcharges, and other taxes, the price of buying a house may increase to approximately 428000 yuan. The monthly repayment amount within the five-year period is 2261 yuan, which is 66 yuan less per month.
Although lower monthly payments and increased borrowing capacity may help some first-time homebuyers who comply with the new policy, Kavcic questions the impact of extending the term on long-term affordability.
He said that when the repayment period is extended, prices often rise, which will lead Canadians to pay more for their mortgages over a longer period of time.
Kavcic also pointed out that an additional five years of interest expenses would result in more long-term payments.
You spread the debt over a longer period of time, become later to repay the debt, and pay more interest during the loan period, "he said. So Canadians are basically taking on more debt for a longer period of time without truly improving their affordability
Ultimately, would Canadians be better off? Maybe not
At the time when the new policy came into effect, the Bank of Canada had continuously cut interest rates in June and July, and borrowing costs were already decreasing.
Tran stated that despite two interest rate cuts, housing prices remain high and Canadian housing remains unaffordable. He expects that there may be more interest rate cuts later this year, which will lead to a rebound in the housing market in the autumn, but the market is still stagnant at present.
Kavcic agrees that the overall affordability of the housing market will be determined by market forces, rather than changes in the repayment terms of the Liberal Party.
He expects that the slow easing cycle of the central bank will help reduce borrowing costs and restore some affordability for homebuyers.
This will take some time. But we are moving towards better affordability, possibly around 2025
Source link:
https://globalnews.ca/news/10673449/30-year-mortgage-amortizations-canada-affordability/