The Liberal government has introduced a new housing policy that aims to make it easier for first-time homebuyers to enter the market. But does it truly deliver the promised benefits?
As someone who is passionate about helping people achieve homeownership, I think it’s worth examining the potential impacts of this policy.
Breaking Down the Latest Announcement
Yesterday, the government announced that starting December 15th, first-time buyers of resale homes will be able to choose a 30-year amortization period instead of the usual 25 years. At first glance, this sounds promising—lower monthly payments could mean improved affordability. However, spreading those payments over a longer period results in higher overall interest costs. And that primarily benefits one group: the banks.
We rarely talk about where all this interest money ends up. It doesn’t just vanish into thin air; it fattens the banks’ bottom lines. You can almost hear the champagne popping in their boardrooms.
Consider this:
Example 1:
- 25-year amortization
- 4.29% fixed rate
- $800,000 mortgage
- $4,334.86 monthly payment
- $500,461 total interest paid over the life of the mortgage (assuming the rate remains constant for 25 years)
Example 2:
- 30-year amortization
- 4.29% fixed rate
- $800,000 mortgage
- $3,936.53 monthly payment
- $617,150 total interest paid over the life of the mortgage (assuming the rate remains constant for 30 years)
In this scenario, the bank would receive over $116,000 more in interest with the extended amortization. While the policy may reduce monthly payments, it significantly increases long-term costs.
Missed Opportunity: Revisiting the Stress Test
If the goal is to improve housing affordability, the current mortgage stress test also deserves attention. The test requires buyers to qualify at rates 2% higher than the actual interest rates, which can limit their purchasing power.
Some argue that adjusting or removing the stress test could allow buyers to qualify for more affordable loans without taking on larger overall interest payments. This could be a more direct way to help first-time buyers.
Investors vs. Homeowners: Unequal Benefits
The policy also extends the 30-year amortization option to pre-construction home buyers. While this may seem like a positive change for all, investors may see the greatest benefit, as they can write off mortgage interest. In contrast, Canadian homeowners do not have this advantage, unlike in the U.S., where mortgage interest can be deducted from taxes.
Easier Access for Higher-Priced Homes
Additionally, the policy allows buyers purchasing homes priced up to $1,499,999 to put down less than 20%. While this might help buyers with strong incomes but smaller down payments, it could mainly benefit those in higher income brackets, potentially overlooking others still struggling to afford a home.
Final Thoughts
While the latest announcement may bring some relief to specific groups of buyers, broader changes—such as adjusting the stress test—might provide more substantial and lasting support for first-time buyers. Whether this policy will create meaningful improvements remains to be seen.
Thanks to Jim Jiang, Mortgage Agent level 2 from Outline Financial on his contribution to the financial scenarios above.
