A government mortgage policy that makes sense – with one glaring question

The state of Canadian housing affordability has long been an acute issue, but government policy attempts to ease the pressure haven’t always made good sense.

That’s why we were pleasantly surprised to see the federal government roll out targeted measures that actually prioritize first-time home buyers, without actively stoking speculative market activity and home price inflation.

The new prebudget teasers announced Thursday by Finance Minister Chrystia Freeland include expanding the withdrawal limit for the RRSP Home Buyers’ Plan (HBP) to $60,000, extending the commencement of its repayment to five years and strengthening language in the mortgage charter for distressed borrowers.

However, it’s the reintroduction of 30-year amortizations for insured first-time home buyers purchasing new builds that’s really making waves. (Insured borrowers are those who pay less than 20 per cent in their home’s down payment. They have been restricted to a 25-year mortgage repayment timeline since 2012, when a number of restrictions were introduced.)

Unlike previous complex and illogical policies – such as the ill-fated First Time Home Buyers’ Incentive – this proposal is looking good on paper. Not only will it provide greater financial flexibility for qualifying borrowers, but it’s also a clear attempt to boost demand for new build supply.

In large urban centres such as the Greater Toronto and Vancouver areas – where new freehold builds well exceed the million-dollar mark – this means condos, but it could apply to new houses in other parts of the country.

Let’s take a look at how a 30-year amortization could impact qualification for a theoretical high-ratio insured borrower, with an income of $80,000 and a down payment of 10-per-cent saved.

Assuming this borrower qualifies for today’s lowest available five-year fixed rate of 4.79 per cent (and passes the accompanying 6.79-per-cent stress-test threshold), they’d be able to purchase a home priced at $342,000 – if amortizing their mortgage over 25 years.

Now let’s stretch that amortization by five years. Doing so would mean the borrower now qualifies for a maximum home purchase price of $364,600 – an extra $22,600, or 6.6 per cent, more.

This is coupled with the fact that first-time buyers now have the most powerful tax-efficient financial vehicles ever to save up their down payments – two buyers could now feasibly save their entire down payment using a combination of the HBP and First Home Savings Account.

However, a glaring question remains: It’s currently unclear how the deposit structure will work for these deals. As new construction builders require up to a 20-per-cent deposit (separate from the down payment) from a buyer before they’ll start building, how would a borrower be able to participate while still being considered high-ratio, and therefore, insured? Will this need to be paired with additional government support to be feasible?

For example, in the case of a purchaser with 10-per-cent down, could the builder turn to the government to float the remaining 10 per cent, knowing that when the deal closes, the new mortgage will then supplant that deposit support?

Some additional questions we’re curious to see answered as this is rolled out:

● There will be an additional mortgage insurance premium for these mortgages – how much will it be?

● Will this new policy apply to assignment sales?

● Will this drive real estate decisions for new builds?

In all, though, it’s a good start. And while the mortgage industry would be heartened to see longer amortizations available to all first-time buyers, regardless of their home purchase type, such helpful improvements – that may actually get buyers into the market – are welcome.

James Laird is the co-founder of Ratehub.ca and president of CanWise Financial mortgage lender. Penelope Graham is the director of content at Ratehub.ca.