The Liberal government’s plan to allow some first-time homebuyers to stretch their mortgage amortizations to 30 years will only improve affordability for a “sliver” of the housing market, according to a BMO economist.
Finance Minister Chrystia Freeland announced Thursday that Ottawa would allow first-time buyers to take out an insured mortgage amortized over 30 years, up from the traditional 25, when purchasing a newly built unit.
The move, which takes effect Aug. 1, was pitched as a bid to give Canadians a leg up when breaking into Canada’s increasingly unaffordable housing market. Giving households a longer time to pay down the overall mortgage can mean paying more over time in interest, but reduces the monthly carrying costs on the loan.
In a note to clients released Friday morning, BMO senior economist Robert Kavcic said the shift would improve a household’s buying power in these transactions by about eight per cent, given the standard five-year fixed-rate mortgage.
But Kavcic also said the actual impact of the policy shift would only hit a “small segment” of the market.
First-time homebuyers account for less than half of all real estate transactions in a typical year, he noted, while insured mortgages make up around 15 per cent of all transactions these days.
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A mortgage is insured if a buyer puts down less than 20 per cent of the home’s purchase price upfront, or if the property’s value is greater than a million dollars. This boxes out even some starter properties in Canada’s most expensive housing markets of Toronto and Vancouver.
Kavcic said the policy could shift buyer demand towards new builds for a time, “but the overall market impact should be limited.”
“And that’s a good thing, as juicing demand is rarely the right prescription for a market already struggling with excess demand,” Kavcic wrote.
The Liberals’ policy shift was hailed by the Canadian Home Builders’ Association on Thursday, which had been calling for such a move to stimulate building in the sector.
In addition to the amortization changes, Freeland announced new rules for first-time buyers making withdrawals from their registered retirement savings plans via the Home Buyers’ Plan.
As of April 16, buyers will be able to take out up to $60,000, an increase from $35,000 previously, towards the purchase of their first home, and will have a total of five years, up from two, until they have to start repaying the withdrawal into their RRSP.
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