The federal government may be changing one mortgage lending rule to help ease the pressure off millennial homebuyers: extending the maximum amortization period for insured mortgages from 25 years to 30.
The change is being considered by Finance Minister Bill Morneau as he prepares to release his last budget before the federal election in October. As it stands, the change, if approved, would only apply to first-time homebuyers.
Currently, when you pay a down payment that’s less than 20% of your total home value, you’re legally required to insure your mortgage with a policy from the Canada Mortgage and Housing Corporation.
Between 2008 and 2012, the Conservative government progressively shortened the maximum amortization period — or the length of time over which homeowners can spread out their mortgage payments — from 35 years to 25.
Advocates of extending the maximum amortization period by another five years, which include Mortgage Professionals Canada and the Canadian Home Builders’ Association (CHBA), argue that the measure would help improve affordability for first-time buyers: if homebuyers are given an additional five years to pay off their mortgage, they could cut down on their monthly payments.
The move would represent a change of tack for the federal government, which has spent the years following the 2008 recession tightening lending rules, in an effort to stop people from buying homes they cannot not afford and triggering a housing crash.
But with recent reports saying that it would take the average homebuyer 111.9 months, or nine years, to save enough for a down payment for a home in Toronto, or an even more staggering 415 months, or 34 years, to save enough for a down payment in Vancouver, critics have begun to ask if it’s time for the government to loosen its grip.
There is one significant downside to an amortization extension, however: more interest. The longer your repayment period is, the more interest you’ll eventually end up paying.
Let’s say you have a $500,000 mortgage, fixed at 2.99% for five years, with 25 year amortization. The total amount of interest you’d pay, over 25 years, is $209,099.
Now, let’s say you extend the amortization period to 30 years. The total amount of interest you’d pay is now $256,128 — that’s a $47,029 difference.
Criticism of tighter mortgage lending rules has been growing this year — the mortgage stress test, introduced by the Office of the Superintendent of Financial Institutions’ (OSFI) at the start of 2018, has especially been in the crosshairs. Since the stress test was introduced, year-over-year housing sales have declined considerably across the country.
Critics argue the stress test was a policy designed to rein in the hot Toronto and Vancouver housing markets, but was applied nationally instead and ended up creating collateral damage. They also contend it unfairly targets first-time homebuyers by reducing their purchasing power.
While extending the maximum amortization period for insured mortgages is one possible proposed solution for housing affordability, the measure’s likelihood of increasing total interest payments for Canadian homeowners has pushed critics in favor of eliminating the stress test as the government’s best move.
But, because changes to the stress test would require the cooperation of OSFI, the amortization extension would be a more likely move since it can be enacted unilaterally by the Finance Department.