new amortization rules won't move the needle for the market—or first-time home buyers

What happened? Canada’s federal government has announced that it will soon permit 30-year amortizations (up from 25 years) on insured mortgages for first-time home buyers of newly-built homes. The new policy comes into effect on August 1st, 2024.

What spurred this policy change? First-time home buyers have arguably been more challenged by housing price shifts and the rising cost of money over the past few years than any other cohort participating in the housing market. In Metro Vancouver, the proportion of first-time home buyers in all home purchases has fallen by almost two-thirds since the beginning of the pandemic.

What impacts will this policy change have? The short answer: minimal ones. The longer answer is as follows.

Extending the maximum amortization period to 30 years, from 25, has the effect of increasing the purchasing power of impacted buyers by 6%, or roughly $40-50K (holding incomes and down payments constant). So, as an example, while a household earning a gross annual income of $115K (and armed with a 20% down payment—no easy feat) would be able to afford a home priced at $679K based on a 25-year amortization, that same household would be able to afford a home priced at $723K based on a 30-year amortization, a $44K increase. For some buyers this could be a meaningful change, but there’s a caveat. 

Remember that this policy applies only to the purchase of new homes (as opposed to existing ones), meaning that upon completion of purchase the buyer must pay 5% GST on the purchase price. Though some buyers may qualify for a partial rebate of the GST they’ve paid, the impact of this will be minimal to nil on the final purchase price—particularly in a high-priced market such as Metro Vancouver, given that the rebate threshold maxes out at $450K. As such, the extension of amortizations applying only to new homes has the effect of reducing the purchasing power lift endowed by the policy change from 6% to, essentially, something near 1%.

Remember also that in Metro Vancouver: new homes (for first-time buyers these would often fall into the category of “pre-sale” homes) tend to be more expensive than their resale counterparts, and the pre-sale market represents only 25% of the total housing market (pre-sales plus resales) per sales counts. So eligible buyers in Metro Vancouver will effectively be funneled into but a sliver of the broader regional housing market. Additionally, the new home, or pre-sale, market may not be the optimal target for those first-time home buyers who are looking for a home to move into now, as opposed to in 2-4 years’ time (save for any newly-completed pre-sale inventory that may be available).

Notably, an all-else-being-equal 1 percentage-point reduction in one’s mortgage rate will create more additional purchasing power than the extension of the amortization period on its own (excluding any GST considerations). Indeed, this is a scenario—a 100 basis-point cut to rates—that is likely to play out by year’s end here in Canada.

Final thoughts. Overall, this amortization policy shift is both understandable and welcome, given the pre-existing context for first-time home buyers. For the market as a whole, this policy change won’t register: it is highly unlikely that any perceptible change to sales counts will be observed as a consequence. For developers of new buildings that consist of homes geared to the first-time home buyer—think smaller, 1-bedroom homes located near transit—this policy may actually help sell homes, which in turn will support the construction of said buildings.

But for first-time home buyers as a group, this policy change is unlikely to move the needle. Indeed, while the policy’s impact on buyers and the market may be small, the government is hoping the impact on the polls will be much larger.