The average age of first-time homebuyers in Canada is thirty-six according to Remax; if on first glance you find this surprising, consider that to meet the minimum deposit requirements on the average Canadian home (which cost $685,809 as of March), you’d need to save over $43,000.
It’s fair to say that getting a foot into the Canadian property market has never been more difficult.
So, in an effort to combat some of the challenges first-time buyers face, the government is making changes to mortgage rules and the Home Buyer’s Plan.
New 30 Year Mortgages
As of August 1st 2024, the maximum amortization period will increase from 25 to 30 years for first-time buyers purchasing a newly built home.
The intent is that this change will allow more people to afford a mortgage, as longer amortization means lower monthly mortgage payments.
A hoped-for secondary effect is an increase in new housing supply, as developers are more likely to invest in new building projects if they believe demand will increase.
Expanded Home Buyer’s Plan
The second major change is to the Home Buyer’s Plan (HBP), which from 1992 has allowed qualified first-time buyers to borrow up to $35,000 from their RRSP to put towards their house deposit.
The borrowed amount must be repaid within 15 years of withdrawal.
Being able to access their tax-free savings for a home purchase has helped many people, but as house prices have risen, the usefulness of the program has shrunk.
The 2024 budget therefore proposed increasing the HBP withdrawal limit to $60,000, with the change coming into effect on April 16th.
Hand-in-hand with the limit increase is a change in repayment rules that applies to anyone who bought their home anytime from January 1st 2022 onwards.
This change states that buyers now have five years to start paying back their RRSP withdrawal, up from two years previously.
The entire balance must still be repaid within 15 years.
Other First-Time Buyer Incentives
There are other incentives for first-time buyers, and the changes mentioned above are intended to work in tandem with them.
For example, the government launched the Tax-Free First Home Savings Account (FHSA) in 2023; this program allows people to contribute up to $8,000 a year (up to a lifetime limit of $40,000) into a tax-free savings account, which can then be used towards their first home downpayment.
This, together with the new HBP limit, means Canadian residents can save up to $100,000, tax-free, for their first home deposit.
Expected Impact on Housing Market
While these measures are intended to make affording a home easier for first-time buyers, it’s still too early to tell whether they’ll have the desired effect.
They’ll certainly increase the number of people able to pass the all-important mortgage stress test in the short-term, but does that really solve anything?
Detractors note that on an individual level, increasing the lifetime of a mortgage may mean more affordability in the short-term, but people will pay more in interest over the life of their loan.
And the reduction in monthly payments thanks to five extra years of repayment time might still be less than the increases caused by interest rate changes.
In addition, 30 year amortization periods are only available for insured mortgages – which only account for about 35% of new mortgages – and rules out anyone purchasing a home worth more than $1 million.
This means the measures will have very different effectiveness across the country, potentially exacerbating existing inequalities.
Buyers of homes less than $1 million in the central provinces or in rural areas are more likely to qualify for the longer mortgage, but those in expensive cities like Toronto and Vancouver, where first-time buyers are already under the most pressure, will likely be automatically priced out of this option.
It’s also important to note that the single biggest factor in improving long-term affordability – housing supply – is only obliquely impacted by these changes.
Sustained population growth and limited housing inventory has created the perfect storm of unaffordability, and increasing the number of potential buyers will not fix this.
But short of drastically increasing the number of new homes built, there is little else that can be done for current would-be-homeowners.
And the changes outlined above will certainly make it easier for some people, in some areas, to buy certain homes.
