Effective August 1, first-time homebuyers purchasing newly built homes can now qualify for a 30-year mortgage, allowing them an extra five years to repay an insured mortgage. For other mortgages requiring default insurance, the 25-year amortization limit remains in effect. This policy update was part of the April federal budget’s strategy to mitigate the ongoing housing crisis.

Some people believe that the new changes will reduce monthly mortgage payments, making it easier for younger buyers facing affordability challenges to enter the housing market. However, several mortgage analysts have raised concerns that these new rules may not benefit a significant number of individuals and could ultimately result in higher costs over the long term.

Who qualifies for 30-year mortgages?

To qualify for a 30-year mortgage from a lender, at least one borrower on the application must meet one of the Canadian government’s criteria for being a first-time homebuyer.

The government defines a first-time buyer as someone who has never owned a home, has not lived in a home owned by themselves or their spouse in the last four years, or has recently gone through a divorce or separation from their common-law partner.

Moreover, the home must be newly constructed and unoccupied.

Additionally, the 30-year amortization period is available only for insured mortgages. For a mortgage to be insured, the buyer must make a down payment of less than 20 percent, and the property must be purchased for under $1 million.

Will This Benefit First-Time Buyers Financially?

Extending the amortization period results in lower monthly payments, which can help individuals qualify for a larger mortgage and afford more expensive homes, providing them with additional monthly income. However, this comes with a trade-off: longer amortization means paying more interest over the life of the loan. RBC’s analysis indicates that a $150,000 mortgage on a 30-year term would reduce monthly payments by just over $75 compared to a 25-year term. However, this would lead to over $20,000 in extra interest costs due to the extended term.

Additional Costs for First-Time Buyers

First-time buyers should be aware of additional costs including:

• Insurance Premium: CMHC will charge a 0.2% premium for the new mortgage measure.
• Down Payment: Most developers require a 15 to 20% deposit up front, typically within six months to a year.
• Challenges: The significant upfront deposit may be a barrier, and the overall effectiveness of the measure is still uncertain.

Extending mortgage amortizations could influence home prices by increasing demand, which may affect overall interest costs over time. Recent interest rate cuts by the Bank of Canada have not yet fully addressed housing affordability, but there is potential for improvements. As adjustments continue, better affordability for homebuyers may become more achievable by 2025.

For personalized advice on how these changes might impact your real estate plans, call us today!