A new 30-year amortization period on insured mortgages for first-time homebuyers of new builds won’t improve affordability, according to a Toronto real estate broker, despite the federal government’s claims that it will help break down barriers to homeownership for Gen Z and Millennials.
As of Aug. 1, mortgage lenders will be able to offer 30 year amortization periods on insured mortgages for first-time homebuyers purchasing new builds.
Mortgage loan insurance protects the mortgage lender in case a buyer can’t make mortgage payments.
Up until now, if a down payment was less than 20 per cent of the price of a home, the longest amortization allowed was typically 25 years for an insured mortgage, as laid out by the Canadian government. However, those who paid a down payment higher than 20 per cent could qualify for a 30-year amortization period, but interest rates would typically be greater due to no mortgage insurance.
Deputy Prime Minister and Minister of Finance Chrystia Freeland claims the longer amortization period will provide younger Canadians with “more affordable monthly mortgage payment options,” according to a statement on Monday.
Toronto real estate broker Bethany King says A 30-year amortization will “free up buying power slightly,” and reduce monthly mortgage payments.
But, Toronto real estate broker and founder of Fox Marin Associates Ltd.,Brokerage, Ralph Fox, said the policy is effectively redundant because it applies to new builds only, where the minimum down payment requirements are often higher than 20 per cent.
Fox referred to the new amortization schedule as “political optics,” and a “big fat nothing burger,” saying it may have an impact if it was applied to resale properties.
“Most developers, or almost all developers, especially in Toronto, when you buy a new home from them, they want at least 20 per cent,” Fox told Now Toronto.
But insured mortgages are distributed to buyers who can’t afford a 20 per cent down payment.
“So you understand the conundrum,” Fox added.
According to Fox, it is unlikely that those with insured mortgages will be able to purchase new-builds in Toronto, and even if they can, they still have to pay insurance premiums and interest over a longer period of time than on a resale property where amortization periods are 25 years.
In addition, most pre-construction condos cost about $1,600 a square foot according to Fox, whereas a resale home is at about $1,000 a square foot.
“New sales are 70 per cent below the 10-year average as a result,” Fox explained, and the fact that buyers are going to have to put more than 20 per cent down to buy from a developer, that basically disqualifies anybody looking at this program,” he concluded.
HOW ARE MORTGAGE INSURANCE PREMIUMS CALCULATED?
Premium rates are based on the down payment a buyer puts down, put simply, the higher the down payment the lower the insurance premium.
So, on a 5-9.99 per cent down payment, the insurance premium is a four per cent multiplier of the mortgage amount. For a 15-19.99 per cent down payment, the insurance premium is a 2.8 per cent multiplier of the mortgage amount.
King gave the following example;
If a home costs $500K with a five per cent down payment, the mortgage amount is $475K with an insurance premium of $19,000 which gets capped onto the mortgage, for a total mortgage amount of $494K.
Buyers also pay the province sales tax (PST) on the insurance, which in this case would be $1,520.
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