Feds Open Door to Longer Mortgages for New Homebuyers, But Will it Help?

First-time buyers of newly built homes can now stretch out their mortgages over 30 years, a move the federal government says will make homeownership more attainable for young Canadians.

The program launched on August 1st, but experts warn it may have limited impact due to its narrow focus and will cost buyers more in the long run.

The Longer Road to Ownership

The new rules allow first-time buyers with insured mortgages to extend their amortization period from the standard 25 years to 30 years. This translates to lower monthly payments, potentially freeing up cash for young buyers struggling with affordability.

What are the conditions?

The program only applies to:

• First-time homebuyers

• Purchases of pre-sale and brand-new homes (i.e., you are the first occupant)

• Homes under $1 million

• The buyers are contributing less than 20 percent equity

Case Study

A benchmark-priced resale condo apartment in Toronto was valued at $684,000 in June 2024. A brand-new property in Toronto would be more expensive than a used one.

We found a listing for a brand new two-bedroom plus den near Dundas E and the Don Valley Parkway, asking for a price of $1.1 million. Let’s continue with $684,000 for our case study because a $1 million property wouldn't qualify for the new program.

If first-time buyers have a 15 percent downpayment of $103,000, they will need a $581,400 mortgage.

With a 25-year amortization, the monthly payments are approximately $3,450, whereas with a 30-year amortization, they are closer to $3,175. The buyers end up with an extra $275 of monthly cash flow.

However, they will make monthly $3,175 payments on the loan for an extra five years. That adds a $190,000 cash outflow between years 26 to 30 that they wouldn't have if they had taken a 25-year mortgage.

So, while the program might help first-time buyers fit a home purchase into their budget, it isn’t a “better deal” financially.

The program pushes them to buy a more expensive property (new vs. used) and then charges them more interest for the privilege of a slightly lower payment.

Experts Divided on Impact

The program's impact is also debated. While some see it as a positive step towards affordability, others caution that it may not be as beneficial as advertised.

Potential Benefits:

• Lower monthly payments could help some buyers qualify for a larger mortgage.

• First-time buyers who have already committed to a pre-sale condo with the expectation of low mortgage rates get some relief. Some pre-sale buyers have had to forfeit their deposits because they couldn’t get financing to complete their purchases.

• Homebuyers in Calgary, Hamilton, Montreal, and Ottawa are the primary beneficiaries.

Potential Drawback:

• Longer amortizations mean paying more interest overall, and they will build equity in their home at a slower pace.

• Homebuyers in the most expensive markets will not feel that the program has significantly improved affordability. First-time buyers in Vancouver and Toronto (two of the largest Canadian cities) still need to save roughly $230,000 to complete a purchase of a $684,000 apartment.

• New build homes are subject to sales tax while existing homes are not. HST on purchasing a $684,000 apartment would be roughly $90,000, almost as much as the 15 percent down payment of $103,000.

• New construction is not best suited to first-time buyers because new homes are more expensive than used ones, and buyers of new homes pay extra government sales taxes.

• Additional costs include mortgage default insurance, which is $16,000.

• In 2023, 19,249 existing used condominium apartments were purchased, compared to 13,393 new apartments. New construction makes up 40% of the market and this program is only available for the smaller and more expensive market.

The Bottom Line

The 30-year mortgage option offers a potential path to homeownership for some first-time buyers, particularly those in more affordable markets.

However, with its limitations and potential drawbacks, prospective buyers should carefully consider their options and weigh the long-term costs before making a purchase.