Big Changes in Canadian Mortgage Rules: What You Need to Know

Big news in the Canadian housing world as the government just announced two major changes to the mortgage rules starting in December that will, in theory, help more people qualify for homes in Canada. But before you go and praise this announcement, read on and then determine whether you think it’s a good idea or maybe it’s just a way that the Liberals are trying to collect more votes from the younger generation. This will ultimately lead to higher housing costs and higher debt loads across the country in the future.

First Major Change: 30-Year Amortization for First-Time Home Buyers

So, change number one is that first-time home buyers will now have the option of a 30-year amortization on their mortgages on any property. On top of that, any buyer will have this option on a new construction purchase. This was brought back into place earlier this year for first-time home buyers but only for buying new construction. Now they’ve extended that even further.

Second Major Change: Increased Default Insurance Amount

The second big change is that the maximum default insurance amount of a mortgage is now up to $1.5 million, which was a million dollars before. This change is likely to have a bigger impact in some of the more expensive markets like Toronto and Vancouver, but I don’t see that one as having as big of an impact here in Nova Scotia.

What Does This Really Mean?

The real question is: what does this really mean? Because in theory, it might sound good, but I’m going to break it down for you a little bit further.

Increased Qualification for Home Buyers

First off, more first-time home buyers will qualify for homes. On top of that, more people in general will qualify for new construction homes. Okay, in theory, this is good.

Lower Monthly Payments, Higher Total Interest

Number two, this is going to bring down their monthly payments on a mortgage if they choose a 30-year amortization versus a 25-year amortization. Okay, again in theory, this is good. However, this will significantly increase the amount of interest paid over the term of a mortgage.

Let’s break down these numbers a little bit for you here. The average home price in Halifax is $575,000, so let’s use that number. With the default insurance added back into this after the down payment, with a 4.5% interest rate at a 25-year amortization, the monthly payment on a $575,000 home would be $3,182. In the first five years, you would pay $70,000 in principal and $121,000 in interest. Over the whole term of the mortgage, you would be paying $955,000 in total, meaning $380,000 in interest.

Now, if this is extended to a 30-year amortization at the same rate and the same price point, your monthly payment would be $2,900. So yes, you’re saving almost $300 a month in this particular case. In the first five years, you would pay only $51,000 in principal and $123,000 in interest. Over time, over the full term, you’d pay a total of $1,044,000, meaning almost $470,000 of interest.

The differences are: in the first 5 years, you’d have $20,000 less equity, and over the whole term of the mortgage, you’re actually paying an extra $89,000. So it is a big, big difference.

Market Impact

What does this all mean outside of the direct cost to a buyer or a homeowner? In theory, this is going to create more demand in the marketplace from the buyer side of things, so this may have an upward pressure on pricing.

If you remember correctly, this is the government trying to make homes more affordable, but if you’re doing it in this manner, it’s likely to have more demand in the marketplace, meaning more upward pressure on pricing. Let’s face it, in Nova Scotia right now, this is the last thing that we need in our real estate market: more demand.

Not to mention, there’s more demand coming anyway as the fixed rates start to drop and the variable rates start to drop as well, as the Bank of Canada is lowering rates and it looks like this trend will continue. So not only are we about to see an upward demand based on the rates coming down, but now we’re also going to see more demand as well once this comes into effect because it’s going to increase the borrowing power of a lot of buyers, especially first-time home buyers.

Current Market Conditions

The interesting thing is, based on the current market conditions, things were already starting to level out and kind of go in the right direction. Prices in a lot of markets were coming down, the Bank of Canada was starting to lower their rates, so things were kind of getting back on track. In other words, as things were naturally starting to fix themselves or get to a better place or a more balanced market, that is the perfect cue for the government to come in, make an announcement, make more regulations or more changes, or in this case, loosening the regulations.

Potential Adverse Effects

This may have adverse effects on the market going forward. Again, the last thing we need is more demand and more upward pressure on pricing, especially in our market here in Nova Scotia. Like many other government announcements in the past, this one seems to be directed towards the coming election, which will be happening in the next year or so. On top of that, it doesn’t make a ton of sense to me.

In theory, making homes more affordable to a buyer per a monthly payment is obviously a good thing. However, it’s going to increase debt loads and do all kinds of other negative things to our market. My thought is that the overall long-term impact of this will be a negative one.

Over the last few years, we’ve been fighting inflation, construction costs, material costs, and housing prices. All this work has been done, and as it’s naturally headed in the right direction based on the rates and all these things, now this may just throw gas on the fire to make the market pop off again, just like it did when the interest rates were low at 2% back in the early days of the pandemic market.

Final Thoughts

In terms of my opinion, making things more affordable from a general statement is obviously a good thing, and I would never argue that. But overall, I don’t see it as making things more affordable because it’s going to increase those debt loads and it’s likely to increase the pricing. While you may pay less per month because you’re on a 30-year amortization, if you have to pay $50,000 more for the home in the first place, it kind of defeats the purpose, right?

I just think that we were naturally trending back to a more balanced, more healthy real estate market already, and I think this is going to cause the opposite effect. Only time will tell, but I think bigger picture, in the long run, this was likely not the best move that could have been made.

My question to you is: what do you think? Are you on board with this? Do you think it’s a good idea or do you think it’s just going to have adverse effects long-term in the Canadian housing market and in the Nova Scotia real estate market as well? I’d love to hear what you think in the comments below.