For many Calgarians, the prospect of a lower monthly payment is more attractive than a shorter loan duration, even if that means paying more interest over time, said Jamil Thobani, a realtor in Calgary
New rules by the federal government that stretch amortization rates for homebuyers and expand the cap for mortgage insurance will do little to make housing more affordable for Calgarians buying properties for the first time in the city, experts say.
Ottawa on Monday announced, effective Dec. 15, the limit for insured mortgages will rise to $1.5 million from $1 million, allowing buyers to purchase more expensive homes with a downpayment of less than 20 per cent.
Buyers will also be able to take out loans for 30 years if they are buying houses for the first time or purchasing new builds. Previously, 30-year-amortizations were confined to first-time homebuyers purchasing newly constructed properties. The limit for the rest of the market was 25 years.
Extending the period over which buyers pay back their loans will reduce their monthly obligation in exchange for higher interest payments.
For instance, the monthly rate for financing a home at the average Canadian price of $649,096 over 30 years at 4.09 per cent interest is $2,895, compared to $3,198 with a 25-year mortgage, according to rates.ca.
The buyer would pay $18,172 less with the 30-year amortization, but their balance at the end of five years, when they would need to renew, would be $20,107 more than if their loan lasted over 25 years.
For many Calgarians, the prospect of a lower monthly payment is more attractive than a shorter loan duration, even if that means paying more interest over time, said Jamil Thobani, a realtor in Calgary.
“In my experience, a lot of first-time homebuyers are more focused on what their monthly payment is,” he said.
“As much as the government is trying to push to create the demand for new housing starts, what this is doing right now is going to cause people to spend more.”
‘Is this a pathway to housing affordability or a road to financial perdition?’
“It’s really about how much more demand will improve and what that means for supply,” said Lurie, chief economist at the Calgary Real Estate Board. “If the demand is strong enough, then you could see some of that uptick in price as well, especially if the supply doesn’t keep pace.”
The new rules, Finance Minister Chrystia Freeland told reporters on Monday, are about making homes “more available to first-time homebuyers.”
However, Andy Yan, director of the City Program at Simon Fraser University, questions whether making homes more accessible by allowing buyers to pile on more debt is an effective policy goal.
“Is this a pathway to housing affordability or a road to financial perdition?” he said.
By billing the new rules as a way to make homes more affordable, the federal government is making certain assumptions, Yan said.
First is that many Calgarians have a steady income they can maintain over 30 years and have a higher capacity to take on debt.
“You’ve seen a lot of households struggle with just maintaining a stable income,” Yan said.
“It also doesn’t fix the problem of, say, how many Canadians will need either domestic or foreign wealth to enter the housing market,” said Yan.
He presented an argument proponents of the policy changes might advance — that increasing homeownership among those who can afford more debt would free up space in the rental market and lead to a drop in rent. However, due to a lack of vacancy control, rental rates could easily spike after the new homeowners leave their old residences.
‘Are these changes really for individual Canadians?’
The second assumption is that Calgary and the rest of Canada have a strong supply to meet this new demand.
The root of a lack of affordability, Yan said, is the surging difference between housing costs and local incomes: “How much you earn is now so disassociated with what you can afford to live in.”
Regarding the increase in insured mortgage limits to $1.5 million, Thobani said many buying homes for the first time wouldn’t consider such expensive homes in Calgary. “Their purchases would usually be an entry-level home,” he said.
Nevertheless, Yan questions the beneficiaries of this new rule. In cases of defaults on mortgages, the CMHC assures the bank through mortgage insurance, whose premium is paid by the homebuyer, that it would pay off the loan to the financial institution — in turn, making the mortgage holder seem less risky to the bank.
“So, then it raises the question: are these changes really for individual Canadians or are they for banks and developers who are part of this housing system?” Yan said.
— With files from Barbara Shector, Financial Post