Minister Chrystia Freeland announced a significant policy change aimed at assisting first-time homebuyers in Etobicoke, Toronto. Starting August 1, 2024, lenders across Canada will be able to offer 30-year amortizations on insured mortgages to first-time homebuyers purchasing newly built homes.
Freeland stated “Our government is focused on delivering fairness for every generation. This very much includes making the dream of homeownership a reality for younger Canadians and for new Canadians,”
The introduction of 30-year amortizations is seen as a strategic move to ease the financial burden on first-time homebuyers by lowering monthly mortgage payments. Currently, the standard amortization period for insured mortgages is 25 years. Extending this period by an additional five years is expected to make homeownership more accessible by reducing monthly mortgage costs.
“This means that 30-year mortgages will be available for applications to mortgage insurers on or after August 1st, and it means that first-time homebuyers will now have 30 years to pay off their mortgage instead of 25 years,” Freeland explained. “That translates to lower monthly payments, so more younger Canadians can afford to pay that monthly mortgage on a new home.”
Freeland highlighted the government’s various measures to support the housing market and aid Canadians in achieving homeownership. These measures include the recently launched tax-free First Home Savings Account, which allows Canadians to save up to $40,000 tax-free towards a down payment on their first home. Additionally, the government has increased the amount that can be withdrawn from RRSPs for a down payment through the Home Buyers’ Plan to $35,000.
“Our fiscally responsible plan has helped put the Bank of Canada in a position to lower interest rates for the second time in a row last week,” Freeland noted. “Lower interest rates mean that mortgage payments will be more affordable, helping more Canadians get into the housing market to buy that first home of their own.”
To understand the financial implications of this new measure, a comparison of mortgage payment scenarios under 25-year and 30-year amortization periods at a 5.31% interest rate is instructive. Here are examples illustrating the potential differences:
For a $100,000 Mortgage:
- 25-Year Amortization:
- Bi-Weekly Payment: $275.52
- Total Payments Over 5-Year Term: $35,817.60
- Interest Paid: $24,774.20
- Principal Paid: $11,043.40
- Balance at End of Term: $88,956.60
- 30-Year Amortization:
- Bi-Weekly Payment: $253.96
- Total Payments Over 5-Year Term: $33,014.80
- Interest Paid: $25,171.01
- Principal Paid: $7,843.79
- Balance at End of Term: $92,156.21
For a $200,000 Mortgage:
- 25-Year Amortization:
- Bi-Weekly Payment: $551.03
- Total Payments Over 5-Year Term: $71,633.90
- Interest Paid: $49,548.34
- Principal Paid: $22,085.56
- Balance at End of Term: $177,914.44
- 30-Year Amortization:
- Bi-Weekly Payment: $507.91
- Total Payments Over 5-Year Term: $66,028.30
- Interest Paid: $50,342.07
- Principal Paid: $15,686.23
- Balance at End of Term: $184,313.77
For a $500,000 Mortgage:
- 25-Year Amortization:
- Bi-Weekly Payment: $1,377.58
- Total Payments Over 5-Year Term: $179,085.40
- Interest Paid: $123,870.86
- Principal Paid: $55,214.54
- Balance at End of Term: $444,785.46
- 30-Year Amortization:
- Bi-Weekly Payment: $1,269.78
- Total Payments Over 5-Year Term: $165,071.40
- Interest Paid: $125,855.15
- Principal Paid: $39,216.25
- Balance at End of Term: $460,783.75
These examples demonstrate that while a 30-year amortization reduces bi-weekly payments, it results in higher interest payments over the same period compared to a 25-year amortization. For instance, on a $500,000 mortgage, the bi-weekly payment under a 30-year amortization is $107.80 less than under a 25-year amortization, but the total interest paid over five years is $1,984.29 more.
As this policy takes effect on August 1, it is curious how Opposition Leader Pierre Poilievre will respond. Given his vocal stance on housing and economic issues, his reaction to this new measure could shape the discourse on affordability and housing policy in the upcoming months. Observers will be keen to see whether Poilievre supports, criticizes, or proposes amendments to this initiative, potentially influencing the broader debate on how best to address Canada’s housing challenges.