Canada's new mortgage rules ease access to housing – but at what cost?

The federal government has unveiled details of its latest mortgage reform plan, making it easier for first-time homebuyers and those purchasing new builds to enter the housing market.

These changes, which take effect on December 15, will allow for smaller down payments and longer mortgage terms, but they come with significant trade-offs, including higher overall costs for borrowers.

The trade-off

Among the new mortgage changes is the expansion of 30-year amortizations to more buyers. Under the new rules, any first-time buyer or anyone purchasing a newly constructed home can now qualify for a 30-year mortgage, provided the loan-to-value ratio is 80% or higher. This extended loan period reduces monthly payments but increases the amount of interest paid over time.

Stretching the mortgage over 30 years will undoubtedly lower monthly costs – by hundreds of dollars in some cases. For example, a homebuyer in British Columbia could see their monthly mortgage payment drop by around $400 compared to a 25-year mortgage.

But that same buyer would end up paying significantly more in interest over the life of the loan, possibly as much as $150,000 more.

While these reforms lower the barrier to entry, they come with the trade-off of a higher overall cost due to extended amortization periods and increased interest payments. As monthly payments shrink, the total amount paid over the life of the loan rises significantly.

A boost for some buyers

Additionally, the government is raising the price cap for insured mortgages. Currently, homes priced above $1 million require buyers to make a 20% down payment.  

In places like Toronto and Vancouver, where average home prices have eclipsed the $1 million mark, the reforms are likely to open up more buying opportunities. For those buying homes in the $1 million to $1.5 million range, the changes will bring down the amount needed for a down payment by more than $100,000 in some cases.

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Now, buyers can take advantage of the lower 5% and 10% down payment structure for homes under $1.5 million. For example, purchasing a $1.4 million home would previously require a down payment of $280,000. Under the new rules, a buyer could put down approximately $115,000, significantly lowering the upfront cost.

While this helps more buyers afford a home, the overall cost of the mortgage will increase substantially due to longer repayment terms and the added interest that comes with it.

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