A barrier to entry into some of Canada’s most expensive real estate markets has just been lowered thanks to new changes impacting the country’s mortgage landscape.
The ability to put less money down on an insured mortgage on a home worth more than $1 million will be a game-changer for some buyers, real estate experts tell Global News.
But how much additional purchasing power do Canadians gain from higher income? insured mortgage ceiling and greater availability of 30-year amortizations will vary from household to household and market to market, they caution.
Previously announced changes by the federal government aimed at making it easier for some Canadians to qualify for a mortgage will come into effect on Sunday.
One of these changes will allow all Canadians considered first-time home buyers, as well as those purchasing new construction, to take out an insured mortgage with a 30-year amortization period, up from the usual 25 years. .
This lowers the bar for qualifying for a mortgage and reduces monthly payments, making home loan repayment costs a little more manageable, although homeowners are likely to owe more over the life of the mortgage.
The other major change is an increase in the price cap under which Canadians can take out insured mortgages or mortgages with a high loan-to-value ratio. These mortgages allow Canadians to put down less than 20 per cent of the purchase price of a home, reducing the savings barrier for buyers.
Under the new rules, Canadians can get an insured mortgage on anything costing $1.5 million or less, up from the previous cap of $1 million. That means buyers will have an easier time saving for a home in some of Canada’s most expensive markets, like Toronto and Vancouver, where property values regularly exceed $1 million.
Elliott Chun, a real estate agent with The Partners Real Estate in Vancouver, told Global News the higher ceiling price is a “game changer” for his clients.
“There is a sense of optimism for the new year and the busy spring market,” he says.
How will a higher insured mortgage cap affect this market?
Buyers will now be able to purchase a home worth up to $1.5 million without having to put 20 percent or more down on the home. Under the new rules, buyers will have to put down 5 per cent on the first $500,000 of the home’s value and 10 per cent on the rest, up to $1 million, when they take out a mortgage. assured.
For a home worth $1.5 million, this brings the minimum down payment required to $125,000, down from $300,000.
Chun explains that in a market like Vancouver, $1 million typically allows a household to purchase a new two-bedroom downtown condominium of about 900 square feet.
Get weekly money news
Get expert insights, questions and answers on markets, housing, inflation and personal finance every Saturday.
But pushing that price up to $1.5 million, buyers could acquire twice the space with three or four bedrooms in a townhouse or semi-detached home, or buy in a completely different neighborhood.
“That extra $500,000 makes a huge difference in the market,” Chun says.
“For today’s buyers, especially couples or young families who are just starting out…this really opens that door.”
Potential buyers may find they have access to larger homes in entire markets that were previously prohibitive, according to Phil Soper, CEO of Royal LePage.
According to the National Brokerage Price Index, 10 municipalities will now be in play for buyers who were limited by the previous $1 million price cap.
Cities like Victoria and Milton, Ontario, where the median price of a single-detached home is between $1 million and $1.5 million, are expected to see more activity in that price range due to the changes, Soper told Global News earlier this month. .
“These are some of the most significant changes that have been made in some time,” Soper said.
“So it’s a big deal and it’s going to add fuel to the recovery fire.” »
What does this mean for prices?
The mortgage changes follow five consecutive interest rate cuts from the Bank of Canada this year. It also lowers the bar for qualifying for potential buyers, many of whom have been sidelined for much of the past two years.
The prospect of being able to afford a little more, both thanks to the higher insured mortgage limit and the prospect of 30-year mortgages, has made Vancouver’s real estate market busier than usual as the year approaches. end of the year, Chun said.
He sees activity picking up on properties valued between $1 million and $1.5 million as potential buyers prepare for the new rules. He expects this to drive up prices in this category.
For those with purchasing power and who can afford to put down 20 percent, prices could even exceed the $1.5 million mark on some properties, as buyers counting on the new cap insured mortgage loan are assigned a price higher than this amount.
“I’ve seen a group of clients experience this twice before, when they went over $1.5 million,” he says.
Some experts who spoke to Global News when the changes were first announced in September argued that while the measures could improve affordability for some potential buyers in the short term, lowering barriers to entry would increase competition in the market, thereby fueling higher prices.
Chun recommended to Global News that buyers hoping to take advantage of the new mortgage rules don’t wait for the prospect of even lower rates from the Bank of Canada, as a flood of first-time buyers could all hit the market in the spring.
“I always like to remind my clients that this is a great opportunity to get out and get ahead of the crowd. Nobody wants to compete,” he says.
Do the mortgage math, advises an expert
Victor Tran, real estate and mortgage expert at Ratesdotca, told Global News that while the new rules may be attractive to some buyers, the income levels needed to qualify for mortgages above $1 million remain prohibitive.
“It’s a huge barrier for most people,” he says.
For the average buyer, moving to a 30-year amortization will increase borrowing power by three to five percent, Tran says.
“It’s not much,” he says, adding that how much an individual gains from a longer amortization depends on the household’s credit score, liabilities and income.
In terms of savings, Ratesdotca estimates that monthly payments would be about $48 lower for every $100,000 of mortgage debt taken out at a five percent interest rate. On a $700,000 mortgage under those conditions, that would mean paying about $286 less per month than under a typical 25-year amortization.
The fundamentals of getting a mortgage haven’t really changed, Tran says, and the higher insured mortgage limit only speeds up the savings process, rather than allowing buyers to qualify who would not have met the criteria previously.
“Now it allows first-time homebuyers who have been waiting to save for the 20% down payment to get into the market sooner,” he says.
But for Canadians who can afford to put 20 percent down, Tran generally recommends doing so, even with the new raised cap.
Although insured mortgage rates tend to be lower on the surface than uninsured products, total costs tend to be higher thanks to insurance premiums. Canada Mortgage and Housing Corporation confirmed earlier this year that it would increase its insurance premiums by an additional 20 basis points on mortgages it insures with a 30-year amortization, for example.
“Yes, your interest rate will be a little higher, but your situation will improve in the long run,” says Tran. “You have to do the math.”
