Understanding What's Changing in the Mortgage World Effective Dec 15th, 2024?

The Canadian government has recently announced some big changes to mortgage rules that might just bring that dream a little closer to reality. But like any major policy shift, these changes come with both benefits and drawbacks. Let's dive in and explore what these new rules mean for you and your home-buying journey.

What's Changing in the Mortgage World?

Before we get into the nitty-gritty, let's break down the two main changes announced by Deputy Prime Minister and Finance Minister Chrystia Freeland:

1. The price cap for insured mortgages is increasing from $1 million to $1.5 million, which means first-time buyers can now buy a home up to $1.5M with less than 20% downpayment.

2. The maximum amortization period for insured mortgages is extending from 25 to 30 years for first-time buyers and anyone purchasing a newly built home.

These changes are set to take effect in December 2024, so if you're in the market for a new home, pay attention!

The Good News: Benefits of the New Mortgage Rules

1. More Homes Within Reach

Imagine you're Sarah, a 32-year-old software engineer in Toronto. You've been saving for years, but with the average home price in the city hovering around $1.2 million, your dream home has always been just out of reach. The increase in the insured mortgage price cap to $1.5 million suddenly opens up a whole new world of possibilities for Sarah and many others like her.

This change means that more homes in high-cost markets like Toronto and Vancouver will now be eligible for insured mortgages. If you have less than a 20% down payment, you'll have access to a wider range of properties that you can buy with mortgage insurance.

2. Lower Monthly Payments

Meet John and Emma, a young couple in Ottawa looking to buy their first home. With the extension of amortization periods to 30 years, they might find their dream home more affordable than they thought.

Here's a quick example: - Home price: $700,000 - Mortgage amount: $665,000 (5% down payment) - Interest rate: 5%

With a 25-year mortgage, their monthly payment would be about $3,866. With a 30-year mortgage, it drops to $3,567.

That's a difference of nearly $300 a month – money that could go towards other expenses or savings.

3. Boost for New Construction

The government hopes these changes will encourage more new home construction. By allowing 30-year mortgages for newly built homes, regardless of whether you're a first-time buyer, they're trying to stimulate demand for new housing. This could lead to more housing supply in the long run, which is crucial for addressing Canada's housing crisis.

The Not-So-Good News: Drawbacks to Consider

1. More Debt, More Interest

Remember John and Emma? While they're excited about the lower monthly payments, there's a catch. Over the life of their 30-year mortgage, they'll end up paying significantly more in interest compared to a 25-year mortgage.

Let's break it down: - 25-year mortgage: Total interest paid = $494,800 - 30-year mortgage: Total interest paid = $619,120

That's an extra $124,320 in interest over the life of the loan. Ouch!

2. Slower Equity Building

With a longer amortization period, you'll build equity in your home more slowly. This means it'll take longer to own a significant portion of your home outright. For some, this could delay future financial goals that rely on home equity, like renovations or using your home's value to fund a business venture.

3. Potential for Higher Home Prices

Here's where things get tricky. By making it easier for people to afford more expensive homes, these new rules could inadvertently drive up housing prices. It's a classic case of supply and demand – if more people can afford $1.5 million homes, sellers might be tempted to raise their prices.

This could be particularly challenging in markets that are already stretched thin. Take Vancouver, for instance. If these changes lead to even more competition for the limited housing stock, we might see prices climb even higher.

4. Higher Mortgage Insurance Premiums

If you're buying with less than 20% downpayment, you'll be in the hook for mortgage insurance premiums. Those premiums increase with a higher loan amount and while they can be rolled into your mortgage payment, it means you are taking on more debt and therefore your monthly payments will increase.

Here is the calculation based on the information available now.

I noticed something startling: under the new December 15 rules, a purchase price of $1,499,999 with a minimum down payment of $124,999.90 incurs a staggering insurance premium of $57,750+PST. Not to mention, the income required to qualify for this mortgage is approximately $327,000!

The Bigger Picture: What This Means for Canada's Housing Market

These changes are part of a broader strategy to address Canada's housing crisis. The government has set an ambitious goal of building almost 4 million new homes by 2031. The success of these new mortgage rules in making housing more affordable will largely depend on whether this increased supply materializes.

If the supply doesn't keep up with the increased demand these rules might generate, we could end up back where we started – or worse, with even higher home prices.

Who Stands to Benefit Most?

1. First-time homebuyers in expensive markets 2. Those looking to purchase newly built homes 3. Buyers with good income but limited savings for a down payment

Who Might Face Challenges?

1. Those already struggling with high levels of debt 2. Buyers in markets where these changes could drive up competition and prices 3. People nearing retirement who might be taking on larger, longer-term debts

Tips for Navigating the New Mortgage Landscape

1. Do the math: Calculate the total cost of a 30-year mortgage versus a 25-year one. Is the lower monthly payment worth the extra interest?

2. Consider your long-term plans: If you're planning to stay in the home for decades, a 30-year mortgage might make sense. If you're likely to move in 5-10 years, the benefits might be less clear.

3. Don't stretch your budget too thin: Just because you can qualify for a larger mortgage doesn't mean you should max out your borrowing capacity.

4. Keep an eye on the market: These changes might affect home prices in your area. Stay informed about local market trends.

5. Explore all your options: Compare offers from different lenders and consider working with a mortgage broker to find the best deal.

The Bottom Line

The new mortgage rules that kick in effective December 2024, offer both opportunities and challenges for Canadian homebuyers. While they may make homeownership more accessible for some, they also come with potential long-term costs and market-wide implications.

As with any major financial decision, it's crucial to consider your personal circumstances, long-term goals, and the broader economic context. These changes might be the key to unlocking your dream home – or they might be a temptation to take on more debt than is wise.

Remember, the path to homeownership is a marathon, not a sprint. Take the time to understand these new rules, seek professional advice if needed, and make a decision that aligns with your financial goals and lifestyle.

Are you excited about these new mortgage rules? Or do you have concerns about their potential impact? Share your thoughts in the comments below!

(This article is a courtesy of deeded.ca)