The Change
As announced in Budget 2024, the Government of Canada introduced significant reforms to mortgage regulations to help more Canadians, particularly younger generations, achieve homeownership. Effective August 1st, the federal government allowed 30-year mortgage amortizations for first-time homebuyers purchasing new builds. Starting December 15th, the rules will expand to all first-time buyers and all buyers of new builds. At the same time, perhaps as a hedging measure, the government will increase the cap on insured mortgages to $1.5 million from $1 million, allowing more people to buy a home with a down payment of less than 20 percent.
The Reason
The government says these changes aim to help more Canadians achieve the dream of homeownership. Federal Finance Minister Chrystia Freeland stated, “It’s about making that first home more available for young Canadians, for first-time homebuyers.” This is part of several measures designed to make housing more affordable.
However, adding five years to a 25-year mortgage lowers monthly payments but also significantly increases the total interest paid by homeowners. It’s also unclear how having more buyers who can purchase more expensive homes with smaller down payments and more debt will improve affordability, the debt load, or the financial outlook for Canadians, especially how it might affect when they plan to retire.
The extra five years can help some first-time homebuyers enter the market, but at an added cost. Many mortgage brokers have commented that the 30-year amortization plan benefits developers and bankers, but homebuyers will ultimately pay the price with added interest. They criticize the risk of deepening debt among already heavily indebted Canadians. Mark Nixon, a commercial mortgage broker with TN Financial Group, even goes so far as to say, “the increase in amortization is a trap, making you work past retirement.” Ron Butler, a mortgage broker with Butler Mortgages, calls the 30-year mortgages unfortunate but necessary, stating that “To even give the slightest chance to young people, you need to give them a 30-year amortization, and regrettably, that means a ton of extra interest… and that’s not great if lowering debt is the goal.” He further adds that the new rules “stimulate higher home prices and more debt, which isn’t great from a long-term perspective.”
The Math
To break it down: assume you have a $950,000 mortgage at a 4.5% interest rate. Switching from a 25-year to a 30-year term will lower your monthly payment by about $450. However, taking an extra five years to pay off your mortgage will cost you almost $150,000 more in total interest.
Longer mortgages may help some Canadians enter the housing market, but it’s crucial to crunch the numbers and understand how the cost of those extra five years will impact you. It’s also important to consider your financial goals. If the goal is to get the house you want at any cost, it may seem positive. But if your goal is to pay the least amount of interest and not carry a large debt load, then it may not be the best choice.
Insured Mortgages
As mentioned, the government will increase the cap on insured mortgages to $1.5 million. If your goal is to enter the housing market and find yourself needing an insured mortgage, banks will typically encourage you to get mortgage insurance through them. However, term insurance that I can offer you is almost always a better solution. Unlike mortgage insurance, which only covers the remaining balance of your mortgage and decreases over time but doesn’t decrease in cost to you, term insurance provides a fixed payout that can be used for any purpose that you want. This means that your loved ones are protected not only against the outstanding mortgage but also other financial needs, like living expenses or any other costs. You’re paying to protect you and your family. You’re not paying to protect the bank as in the case with mortgage insurance.
Term insurance is also often more affordable than mortgage insurance and stays constant throughout the policy term, meaning you’re actually getting the protection you’re paying for. It’s portable, meaning it isn’t tied to your mortgage lender, and can remain in effect even if you move or refinance. This flexibility ensures you have continuous coverage without needing to requalify based on health or other factors. Term insurance is designed to protect you and your loved ones, offering flexibility and a guaranteed payout. Mortgage insurance, on the other hand, benefits the bank by covering only the remaining mortgage balance.
Investing
If you’re considering using these new rules to buy a home as an investment, it’s worth noting that investing in equities often presents a more attractive opportunity compared to real estate. Equities provide the potential for higher returns with fewer headaches. Over the long term, the stock market has historically outperformed real estate, offering substantial growth opportunities. Diversifying your investments across different sectors and companies can help mitigate some of the volatility, unlike real estate, where market downturns can significantly impact property values, which, if you’re investing in real estate, will typically all be in the same area or market.
Check out the chart below comparing Canadian home prices, represented by the Teranet National Bank House Price Index, versus Canadian stocks, represented by the S&P TSX Composite Total Return Index, and US stocks, represented by the S&P 500 Total Return Index.
Stocks and mutual funds offer liquidity, meaning you can buy and sell them relatively quickly without the lengthy process involved in selling a property, and often without the taxes you have to pay on an investment property. This flexibility and lower taxes can be particularly valuable if you need to access your money on short notice and want to keep as much of it as possible and not give it to the government.
Additionally, investing in equities saves you the headaches associated with property management. Real estate investments come with responsibilities such as maintenance, repairs, and dealing with tenants, which can be time-consuming and stressful. Investing in real estate also comes with the added challenge of managing mortgage payments, especially in periods of high interest rates like we’ve seen in recent years. High interest rates can significantly strain your cash flow, making it harder to maintain profitability or even the day-to-day living you want. In contrast, equities allow you to invest your money without the physical and logistical burdens of homeownership or the financial strain of fluctuating mortgage costs, making them a more straightforward and hassle-free option.
The Help
As your holistic wealth advisor, I can help you navigate all of these decisions. Together, we can create a comprehensive financial plan that aligns with your goals and ensures you’re managing your cash flow effectively. This includes assessing the impact of different mortgage terms on your overall financial health, finding ways to reduce your debt load, and optimizing your cash flow to support your long-term financial objectives.
Whether you need help calculating the costs associated with different mortgage options under these new rules, protecting yourself with term insurance rather than protecting the bank with their mortgage insurance, or developing a broader financial strategy, I’m here to guide you every step of the way. Let’s work together to ensure your homeownership journey aligns with your financial goals and provides you with the stability and peace of mind you deserve.
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