30-Year Mortgage: Will It Ease the Affordability Crisis or Make It Worse?
May 1, 2024
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
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The sharp surge in home prices amid the pandemic, spurred by historically low interest rates, has eroded affordability drastically for the average Canadian. Home ownership costs have increased to as high as 54% of the average household disposable income. Despite moderation in the rapid price hikes seen during the pandemic, affordability remains out of reach due to sluggish income growth and the inflationary pressure on essentials. This challenge persists even as home prices have begun to decline since the second quarter of 2023.
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Figure 1.0
Source: Bank of Canada
Housing Affordability Index: a ratio of housing-related costs (mortgage payments and utility fees) to average household disposable income.
Housing Price Index: Measures changes over time in the contractors' selling prices of new residential houses.
Housing Affordability Index: a ratio of housing-related costs (mortgage payments and utility fees) to average household disposable income.
Housing Price Index: Measures changes over time in the contractors' selling prices of new residential houses.
First-time homebuyers have borne the brunt of the affordability crisis with their numbers steadily dwindling over the years which has been exacerbated by the pandemic's effects. This decline is particularly pronounced among young individuals under 36 who are on the verge of establishing families, accumulating savings, and bolstering economic activity. The proposed policy change seeks to reinvigorate this crucial segment of the market, fostering opportunities for aspiring homeowners to enter the market.
Figure 2.0
Source: Bank of Canada
The federal government has announced that it will allow 30-year amortization periods on insured mortgages for first-time homebuyers purchasing newly built homes. In addition, the government also raised the amount that first-time homebuyers can withdraw from their Registered Retirement Savings Plans (RRSPs) to $60,000 from $35,000 to buy a home.
We conducted an analysis to assess the impact of this policy change on the affordability of homes, specifically focusing on variations in tenure and down payment. Our examination included evaluating how changes in these factors affect both the average and the lowest home prices, as reported by CREA[1] .
Our findings indicate that solely increasing tenure leads to a modest 2.2% improvement in affordability, assuming a downpayment of 15%. However, when tenure and down payment are adjusted together, affordability sees a more significant increase of 5.6%. This suggests that while extending the time frame for payment helps, the ability of first-time homebuyers to provide a larger down payment has a more substantial effect on affordability.
Considering a mortgage-to-income ratio of 40%, we calculated the minimum household income required to afford a home at both average and lowest price points. Our analysis reveals that to afford a home under these conditions, a household would need an income of approximately $83,400, with a corresponding down payment of $105,500. At a 10% savings rate (far exceeding the typical long-term average savings rate of 6% for Canadian households), it would take approximately 13 years to accumulate the necessary funds, emphasizing the significant financial commitment involved in homeownership and showing where the pain point of affordability lies.
We conducted an analysis to assess the impact of this policy change on the affordability of homes, specifically focusing on variations in tenure and down payment. Our examination included evaluating how changes in these factors affect both the average and the lowest home prices, as reported by CREA[1] .
Our findings indicate that solely increasing tenure leads to a modest 2.2% improvement in affordability, assuming a downpayment of 15%. However, when tenure and down payment are adjusted together, affordability sees a more significant increase of 5.6%. This suggests that while extending the time frame for payment helps, the ability of first-time homebuyers to provide a larger down payment has a more substantial effect on affordability.
Considering a mortgage-to-income ratio of 40%, we calculated the minimum household income required to afford a home at both average and lowest price points. Our analysis reveals that to afford a home under these conditions, a household would need an income of approximately $83,400, with a corresponding down payment of $105,500. At a 10% savings rate (far exceeding the typical long-term average savings rate of 6% for Canadian households), it would take approximately 13 years to accumulate the necessary funds, emphasizing the significant financial commitment involved in homeownership and showing where the pain point of affordability lies.
Table 1.0
Source: REIC analysis
A mere fraction of Canadians under the age of 36, representing less than 10%, earn $100,000 or above. This is the average income needed to afford a home in Canada at current interest rates. Additionally, fewer than 15% of individuals within this age bracket earn $85,000 or more, which is what is needed to afford a home on the lower end of the average home price. Consequently, the proposed policy change is projected to benefit no more than 5% of first-time homebuyers.
An important consideration is whether the number of beneficiaries resulting from the policy adjustment is substantial enough in comparison to its potential impact on the already elevated housing prices, limited supply, and the financial constraints faced by many prospective buyers. It is worth noting that not all individuals may possess the financial acumen to fully comprehend the ramifications of an extended amortization period, which could further complicate matters.
Who stands to benefit the most from this policy change? While it may ostensibly target first-time homebuyers, the primary beneficiaries are likely to be banks and developers rather than the intended demographic.
Based on mortgage origination data from the Bank of Canada, over 50% of mortgage originations are from first-time buyers, a proportion that has dwindled recently due to affordability concerns. This policy, coupled with proposals to bolster credit scores by factoring in rent payments during underwriting evaluations, expands the market potential. Additionally, extending mortgage tenures translates to higher interest earnings for banks. However, caution is warranted to prevent banks from relaxing credit standards excessively, although they would largely remain insulated due to the insurance coverage on these disbursements.
For developers grappling with declining home sales and prices in recent quarters, the influx of fresh demand could rejuvenate sales and stabilize prices.
While this policy may offer immediate relief to a segment of homebuyers in achieving their homeownership aspirations, the resultant surge in demand could coincide with the anticipated reduction in interest rates, leading to a rapid escalation in prices. Such a scenario risks exacerbating the affordability crisis without giving prices adequate time to cool down. Furthermore, it could constrain the financial flexibility of many vulnerable individuals chasing the elusive dream of homeownership without due consideration for financial prudence.
In addition, opting for a 30-year mortgage could potentially defer retirement plans. Though our analysis indicates that easing restrictions on the use of RRSP for down payments could notably enhance affordability, this accommodation may exert a considerable influence on the accumulation of retirement funds given the extended repayment period it allows.
For a first-time homebuyer, critically evaluating current and future needs as well as considering one’s lifestyle, family size, income level, and potential for growth are crucial to make the right purchase.
First-time home buyers in Canada should consider the following key factors:
Market Conditions and Interest Rates: Keep an eye on local housing market trends and consult experts to gauge the direction of interest rates. This can help you decide whether to lock in a mortgage rate or wait for potentially lower rates in the future.
Financial Readiness: Assess your financial situation and ensure you have enough savings for a down payment and other associated costs. A Tax-Free Savings Account (TFSA) lets you save or invest your money tax-free. You won’t pay tax on money you withdraw from your TFSA and you can use your TFSA to help you buy a home.
Down Payment: The minimum down payment required depends on the purchase price of the home. For a home priced at $500,000 or less, the minimum down payment is 5% of the purchase price. For homes priced between $500,000 to $999,999, it’s 5% of the first $500,000 of the purchase price + 10% of the portion of the purchase price above $500,000. For homes priced at $1 million or more, the down payment is 20% of the purchase price.
Mortgage: Understanding how mortgages work in Canada is crucial. You should consider getting pre-approved for a mortgage to understand how much you can afford. Assess your income stability, age, and career trajectory to determine the appropriate mortgage term. A longer term might offer more stability with fixed payments, while a shorter term could mean higher payments but quicker equity buildup.
First-Time Home Buyer Programs and Rebates: The Canadian government offers several programs to assist first-time home buyers, such as the First Home Savings Account (FHSA), the Home Buyers’ Plan (HBP), and the Home Buyers’ Tax Credit.
Closing Costs: These are additional costs that include land transfer tax, legal fees, inspection fees, and insurance. They typically range from 1.5% to 4% of the home’s selling price.
Financial planning to reduce the cost impact: Evaluate the impact on your long-term finances and tax implications. Withdrawing from your RRSP savings might incur taxes and affect your retirement funds, whereas opting for a higher mortgage could mean paying more interest over time.
Finding the right home for you:
Size and Property Type: Consider factors like your current needs, future plans (such as starting a family), and lifestyle preferences. A condo might be ideal for singles or couples looking for low maintenance, while a detached house offers more space and privacy but also entails higher upkeep.
Home Inspection: Before finalizing the purchase, it's essential to have a thorough home inspection conducted by a qualified professional. This can uncover any hidden issues or potential maintenance concerns, helping you make an informed decision and avoid unexpected expenses down the line.
Location: Evaluate the neighbourhood's amenities, such as schools, parks, shopping centers, and public transportation options. Consider factors like commute times to work and accessibility to essential services to ensure the location aligns with your lifestyle and future needs.
A certified real estate professional can help answer these questions and ensure that you build a secure future for your family. Talk to a Real Estate Institute of Canada (REIC) | Institut canadien de l'immeuble (ICI) Member today for expert advice on strategies to achieve your dream of home ownership. Find an FRI who can help you find your home.
An important consideration is whether the number of beneficiaries resulting from the policy adjustment is substantial enough in comparison to its potential impact on the already elevated housing prices, limited supply, and the financial constraints faced by many prospective buyers. It is worth noting that not all individuals may possess the financial acumen to fully comprehend the ramifications of an extended amortization period, which could further complicate matters.
Who stands to benefit the most from this policy change? While it may ostensibly target first-time homebuyers, the primary beneficiaries are likely to be banks and developers rather than the intended demographic.
Based on mortgage origination data from the Bank of Canada, over 50% of mortgage originations are from first-time buyers, a proportion that has dwindled recently due to affordability concerns. This policy, coupled with proposals to bolster credit scores by factoring in rent payments during underwriting evaluations, expands the market potential. Additionally, extending mortgage tenures translates to higher interest earnings for banks. However, caution is warranted to prevent banks from relaxing credit standards excessively, although they would largely remain insulated due to the insurance coverage on these disbursements.
For developers grappling with declining home sales and prices in recent quarters, the influx of fresh demand could rejuvenate sales and stabilize prices.
While this policy may offer immediate relief to a segment of homebuyers in achieving their homeownership aspirations, the resultant surge in demand could coincide with the anticipated reduction in interest rates, leading to a rapid escalation in prices. Such a scenario risks exacerbating the affordability crisis without giving prices adequate time to cool down. Furthermore, it could constrain the financial flexibility of many vulnerable individuals chasing the elusive dream of homeownership without due consideration for financial prudence.
In addition, opting for a 30-year mortgage could potentially defer retirement plans. Though our analysis indicates that easing restrictions on the use of RRSP for down payments could notably enhance affordability, this accommodation may exert a considerable influence on the accumulation of retirement funds given the extended repayment period it allows.
For a first-time homebuyer, critically evaluating current and future needs as well as considering one’s lifestyle, family size, income level, and potential for growth are crucial to make the right purchase.
First-time home buyers in Canada should consider the following key factors:
Market Conditions and Interest Rates: Keep an eye on local housing market trends and consult experts to gauge the direction of interest rates. This can help you decide whether to lock in a mortgage rate or wait for potentially lower rates in the future.
Financial Readiness: Assess your financial situation and ensure you have enough savings for a down payment and other associated costs. A Tax-Free Savings Account (TFSA) lets you save or invest your money tax-free. You won’t pay tax on money you withdraw from your TFSA and you can use your TFSA to help you buy a home.
Down Payment: The minimum down payment required depends on the purchase price of the home. For a home priced at $500,000 or less, the minimum down payment is 5% of the purchase price. For homes priced between $500,000 to $999,999, it’s 5% of the first $500,000 of the purchase price + 10% of the portion of the purchase price above $500,000. For homes priced at $1 million or more, the down payment is 20% of the purchase price.
Mortgage: Understanding how mortgages work in Canada is crucial. You should consider getting pre-approved for a mortgage to understand how much you can afford. Assess your income stability, age, and career trajectory to determine the appropriate mortgage term. A longer term might offer more stability with fixed payments, while a shorter term could mean higher payments but quicker equity buildup.
First-Time Home Buyer Programs and Rebates: The Canadian government offers several programs to assist first-time home buyers, such as the First Home Savings Account (FHSA), the Home Buyers’ Plan (HBP), and the Home Buyers’ Tax Credit.
Closing Costs: These are additional costs that include land transfer tax, legal fees, inspection fees, and insurance. They typically range from 1.5% to 4% of the home’s selling price.
Financial planning to reduce the cost impact: Evaluate the impact on your long-term finances and tax implications. Withdrawing from your RRSP savings might incur taxes and affect your retirement funds, whereas opting for a higher mortgage could mean paying more interest over time.
Finding the right home for you:
Size and Property Type: Consider factors like your current needs, future plans (such as starting a family), and lifestyle preferences. A condo might be ideal for singles or couples looking for low maintenance, while a detached house offers more space and privacy but also entails higher upkeep.
Home Inspection: Before finalizing the purchase, it's essential to have a thorough home inspection conducted by a qualified professional. This can uncover any hidden issues or potential maintenance concerns, helping you make an informed decision and avoid unexpected expenses down the line.
Location: Evaluate the neighbourhood's amenities, such as schools, parks, shopping centers, and public transportation options. Consider factors like commute times to work and accessibility to essential services to ensure the location aligns with your lifestyle and future needs.
A certified real estate professional can help answer these questions and ensure that you build a secure future for your family. Talk to a Real Estate Institute of Canada (REIC) | Institut canadien de l'immeuble (ICI) Member today for expert advice on strategies to achieve your dream of home ownership. Find an FRI who can help you find your home.
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]