30-year amortizations will only impact a ‘sliver’ of the housing market: BMO

Aerial views of houses are pictured in a neighbourhood in Ottawa, Ontario on Monday, April 17, 2023.

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.

Video: Business News: Changes coming to mortgages in Canada?

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.

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.

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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.