As part of the Federal budget, on April 11’24 several noteworthy updates to Canada’s housing policies were announced. The updates include significant changes to the Home Buyers’ Plan (HBP) and the amortization rules for first-time home buyers – both changes aimed at making home ownership more accessible and affordable.
Let’s start with a detailed breakdown of these changes…
Amortization Rule Changes for First-Time Home Buyers
Extension of Amortization Period: The primary change is the extension of the maximum amortization period for insured mortgages from 25 years to 30 years for first-time home buyers purchasing newly built homes. This longer amortization period reduces the amount of each monthly mortgage payment by spreading the repayment of the loan over a longer time frame
In what scenario is a mortgage insured? When the value of the property is less than $1 million and when the down payment is between 5-20%
Eligibility: This amortization extension applies exclusively to first-time home buyers who choose to buy newly constructed homes. The rationale is likely to stimulate the construction sector and to direct financial benefits to homebuyers entering the market for the first time
Effective Date: This change is set to take effect on August 1, ensuring that all transactions completed after this date can potentially qualify for the extended amortization period, provided other criteria are met
Impact: As the scenario below illustrates, this change will help first-time home buyers who purchase a home that qualifies for the extended by reducing the size of their mortgage payment.
Example: What will be the actual impact on affordability?
The change will also help prospective buyers to be able to purchase a more expensive property (maybe in a more preferred location). That’s because if $3393 per month is what you can afford according to your budget for a mortgage payment (and that would have allowed you to get a $572,205 mortgage based on a 25 yr amortization), then with a 30yr amortization you can now afford a larger mortgage for a more expensive home (and still stay within your budget)
Changes to the Home Buyers’ Plan (HBP)
Increased Withdrawal Limit: The government has raised the amount that first-time homebuyers can withdraw from their Registered Retirement Savings Plans (RRSPs) under the Home Buyers’ Plan. Previously, individuals could withdraw up to $35,000, but this limit has now been increased to $60,000. This allows individuals or couples to access more of their saved retirement funds to cover the costs of purchasing a home without immediate tax penalties.
Extended Repayment Window: There’s also an extension in the repayment timeline for funds withdrawn under the HBP. Previously, homebuyers had to start repaying the withdrawn amount within two years of the withdrawal, but now they will have up to five years to begin repayment. This provides greater flexibility and eases the financial burden during the initial years of homeownership.
Application Dates: These changes to the HBP withdrawal limits and repayment terms will take effect on April 16. It’s important for potential homebuyers to note that these new terms apply to withdrawals made between January 1, 2022, and December 31, 2025
Broader Context and Goals
These updates are part of a broader suite of measures introduced by the Canadian government to address the housing affordability crisis. By focusing on first-time homebuyers and stimulating new home construction, the government aims not only to help individuals achieve home ownership but also to invigorate related economic sectors such as construction and real estate.
Additionally, these changes align with the government’s goals of increasing the housing supply as reflected in other initiatives like the First Home Savings Account (FHSA) and adjustments to the Canadian Mortgage Charter. The FHSA, for example, allows prospective homebuyers to save for their first home with tax-deductible contributions and tax-free withdrawals, complementing the changes to the Home Buyers’ Plan and updated amortization rules.
Together, these policy updates are designed to provide multiple layers of support to first-time homebuyers, helping them navigate the significant financial challenges of entering the housing market, particularly in high-demand urban areas.
A significant portion of the market is outside the scope of the new policy
Critics argue that the policy is too narrow and that the benefit of a 30-year amortization should extend to all Canadian homebuyers, not just first-time buyers of new builds. This broader application could alleviate some of the pressure on the housing market more uniformly across the country.
The policy is also limiting because the opportunities for new builds vary across different regions. In areas like Greater Vancouver and Toronto, where space for new constructions is scarce, the policy’s impact might be muted, as many buyers are pushed towards purchasing existing homes that do not qualify under the new rules.
Further complicating matters, many properties in these high-demand areas exceed the $1 million mark, which generally requires buyers to obtain uninsured mortgages that are ineligible for the extended amortization period. This places a significant portion of the market outside the scope of the new policy, potentially undermining its effectiveness in the regions where it is needed most.
Conclusion – there’s still work to do…
While the extension of amortization periods is a positive step towards making homeownership more accessible for some Canadians, the limited scope of the policy and the geographic and financial realities of Canada’s housing market suggest that more comprehensive measures are necessary. Expanding the eligibility for longer amortization periods and addressing the high costs of housing in major urban centers are critical next steps that could enhance the effectiveness of this policy.
Domenic Gallippi
domenic@bettermortgagesbydom.ca
Tel: 416-801-6616 | Cell: 416-801-6616
