Aug 15 min read

First-Time Home Buyers And 30-Year Mortgages in Canada

As Canadians continue to face a challenging housing market, the introduction of 30-year mortgages has sparked multiple conversations.

This change, a bid by the Liberal government to make homeownership more accessible, promises to reduce monthly payments by extending the amortization period from the standard 25 years to 30 years. But does this really improve affordability?

After all, as of Quarter 1 of 2024, only 12.47% of mortgages were default-insured, and this change would only impact those buyers.

Understanding the 30-Year Mortgage: What’s Changed?

The Shift from 25 to 30 Years: What It Means for Homebuyers

The primary motivation behind the 30-year mortgage is to lower monthly payments, making homeownership more attainable for Canadians, particularly first-time buyers.

By stretching the amortization period to 30 years, the immediate financial burden on new homeowners is reduced, allowing them to spread out their payments over a longer period. However, this shift is not without its complexities. While monthly payments may decrease, the overall cost of the mortgage over time increases as borrowers pay more in interest. This raises the question: Is this truly a viable solution for improving housing affordability, or is it simply shifting the financial burden further into the future? That is a question you need to ask yourself when you're first signing on for your new mortgage.

Look at the interest paid over 25 years and 30 years and see if the lower payments are worth it.

Qualification Criteria: Who Can Benefit?

Not all Canadians will qualify for a 30-year mortgage. To be eligible, at least one borrower on the mortgage application must meet the Canadian government’s definition of a first-time homebuyer. This includes individuals who:

Have never purchased a home before.
Have not lived in a home they or their spouse owned in the last four years.
Have recently gone through a divorce or the end of a common-law relationship.

Additionally, the 30-year amortization applies exclusively to insured mortgages. For a mortgage to be insured, the buyer must put down less than 20% upfront, and the purchase price of the property must be less than $1 million. This restriction significantly limits the pool of potential beneficiaries, particularly in high-priced markets like Toronto and Vancouver, where even entry-level homes often exceed this threshold.

The Financial Impact: Purchasing Power vs. Long-Term Interest Costs

Increased Borrowing Power

One of the key benefits touted by proponents of the 30-year mortgage is the increase in borrowing power. By extending the amortization period, buyers may qualify for larger loans, potentially allowing them to purchase more expensive homes. Depending on the purchase price and interest rates on the market, this could boost a homebuyer’s borrowing capacity by roughly 5% in some cases.

However, this increase in borrowing power comes at a cost. The longer amortization period means that while monthly payments may be lower, the total amount of interest paid over the life of the loan is significantly higher. This raises concerns about whether the short-term relief of lower payments is worth the long-term financial burden.

25-Year Mortgage Verus 30-Year Mortgage Analysis

To illustrate, let’s consider the numbers.

A first-time buyer in Ontario with an annual income of $100,000 and a five-year fixed-rate mortgage at 5% could, under a 25-year amortization, expect to pay $2,338.77 per month on a home valued at $427,124 (assuming a $25k down payment). Extending the amortization to 30 would reduce this payment to $2,146.10. A $192.67 decrease. See the chart below to see the interest cost over time.

Amortization	Lifetime Interest Cost
25 Years	$299,508.89
30 Years	$370,470.48
Difference	$70,961.59

While this reduction may seem appealing, the buyer will ultimately pay more interest over the life of the loan, delaying the point at which they become debt-free.

Extending to 30 years might also allow them to purchase a home worth approximately $452,672 (again assuming a $25k down payment), with monthly payments of $2,632.76.

In addition, the Canada Mortgage and Housing Corporation (CMHC) imposes an insurance surcharge on extended amortizations, adding another 20 basis points to the existing mortgage insurance premiums. In Ontario, this surcharge is also subject to tax, further increasing the closing costs.

The Impact on Housing Affordability

Realistically, the introduction of 30-year mortgages does little to address the root causes of housing unaffordability in Canada.

While the extended amortization may provide temporary relief for some buyers, it also has the potential to drive up home prices, as increased borrowing power often leads to higher demand and, consequently, higher prices. Moreover, the long-term financial implications of a 30-year mortgage are significant. By spreading payments over a longer period, homeowners are taking on more debt for a longer time, with no real reduction in the overall cost of homeownership.

This could lead to a situation in which Canadians pay more for longer without substantially improving their financial situation.

The Broader Economic Context: Interest Rates and Market Dynamics

The Role of Interest Rates in Housing Affordability

The introduction of 30-year mortgages comes at a time when interest rates are declining, following the Bank of Canada's back-to-back cuts in June and July 2024.

While lower interest rates can help reduce borrowing costs and improve affordability, multiple housing dynamics are at play. The Bank of Canada's policy rate will have a more significant impact than the extended amortizations.

As the central bank continues to lower interest rates, borrowing costs are expected to decrease further, potentially restoring some level of affordability for sidelined home buyers.

The Future of Housing Affordability

Looking ahead, the long-term impact of 30-year mortgages on housing affordability remains uncertain for many Canadians.

While they may provide short-term relief for a small segment of the population, the broader issues of housing supply, demand, and economic policy will continue to shape the market. The dream of homeownership will remain out of reach until more substantive measures are taken to address the underlying factors driving housing unaffordability, such as a larger supply, immigration, builder costs, and property taxes.

As the market evolves, it will be crucial for policymakers to consider the long-term implications of their decisions and to seek solutions that provide sustainable, equitable access to homeownership for all Canadians.

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