New mortgage rules: What they mean for buyers

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September 25, 2024

New mortgage rules: What they mean for buyers

Key facts:

– Mortgages extended to 30 years for buyers with less than 20% down: Buyers can now spread their payments over 30 years, reducing monthly payments.
– Financing with 5% down payment: For properties under $500,000, a 5% down payment is possible. Above $500,000, a 10% down payment is required.
– Increased financing capacity: On average, households will be able to borrow 8 to 9% more.
– Risk of property price rises: Increased demand without an immediate increase in supply could push up prices, especially in major cities.
– Higher total cost over 30 years: Although monthly payments are lower, long-term interest increases the total investment.

The Canadian real estate market is about to undergo a major change when a new mortgage rule comes into effect on December 15, 2024.

The main change concerns a key measure: the extension of mortgages to 30 years for buyers with less than 20% down. The aim of this reform is to make home ownership more affordable in a context of housing crisis.

These new rules particularly affect buyers in high-demand markets such as Toronto, Vancouver and Montreal, where real estate prices have risen sharply in recent years and housing inventory remains tight.

Mortgage loans: the new measures in detail
Impact of new measures on the Canadian real estate market
Fixed vs. variable mortgage rates in 2024: which to choose?
The risks associated with these new measures

Mortgages: the new measure in detail

Extending amortization to 30 years

Amortization is the length of time over which a mortgage is repaid.

Before the new rules, the maximum amortization for loans was 25 years, except when the down payment was at least 20%. A 30-year amortization period was also available for new-build properties only. With the new measures, it is now possible to spread your mortgage over 30 years for properties up to 1.5 million, regardless of the type of property.

The introduction of 30-year mortgages for buyers with less than 20% down payment now allows buyers to spread their payments over a longer period, reducing monthly payments. This is particularly beneficial for first-time buyers, as it makes property more accessible.

However, a longer amortization period implies a higher overall cost due to the additional interest paid over the life of the loan. For example, on a $500,000 mortgage, amortization over 30 years at 5% interest would result in lower monthly payments than amortization over 25 years, but at the cost of higher total interest.

Example: Over 25 years: monthly payments would be $2,908, Over 30 years: monthly payments drop to $2,684, offering a gain of $224 per month.

However, this short-term gain means a higher total cost over the life of the loan, as interest accumulates over a longer period. By choosing a 30-year amortization, you’ll pay more interest than over 25 years. For example, in this example, total interest costs could increase by nearly $50,000.

Financing and contribution

It’s still possible to get a mortgage with as little as 5% down for properties worth less than $500,000.

Above $500,000, the minimum downpayment is 10% for any type of property (single-family home, triplex, etc.).

These conditions allow easier access to property without the need for buyers to raise a large down payment.

Impact of new measures on the Canadian real estate market

Increased financing capacity

The extension of amortization to 30 years for up to $1,500,000 directly increases buyers’ financing capacity. In other words, buyers now have the option of spreading their payments over 30 years, thereby reducing monthly payments.

With this extension, monthly payments decrease, making homes more affordable in the short term, especially for first-time buyers. This increases their purchasing power, enabling them to consider properties in neighborhoods previously out of their financial reach.

It is estimated that the implementation of these measures should increase average household borrowing capacity by 8-9%, which should maintain significant buying pressure for at least the first quarter.

Kyle Shapcott – Leader in real estate

Rising property prices

While these measures are designed to improve housing affordability, they risk creating a snowball effect on prices. By increasing households’ purchasing power without immediately resolving the shortage of housing supply, we can expect prices to rise, particularly in already tight markets such as Toronto, Vancouver and, to a lesser extent, Montreal.

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Fixed vs. variable mortgage rates in 2024: which to choose?

One of the major decisions facing buyers and investors in 2024 is the choice between a fixed and a variable mortgage rate. Each option has its advantages and disadvantages, depending on the borrower’s economic circumstances and personal preferences.

Fixed mortgage rate: security and stability

A fixed rate remains constant throughout the term of the loan (often between 1 and 5 years). This means that monthly payments will remain unchanged, offering predictability and security to borrowers, regardless of fluctuations in market interest rates.

Currently, insured fixed rates with less than 20% down are around 4.29%, but this can fluctuate according to economic conditions.

Variable mortgage rate: an opportunity with rates set to fall

A variable rate fluctuates according to the Bank of Canada’s key rate and market conditions. As a general rule, the variable rate starts lower than the fixed rate, but may increase or decrease over time.

At present, a variable rate becomes more advantageous than a fixed rate from the 19thᵉ month of repayment. This trend could intensify, making variable rates more competitive than fixed rates in a shorter timeframe.

Differences explained in table :

Criterias	Fixed rate	Variable rate
Stability	The rate remains constant throughout the term	The rate fluctuates with the market and the key rate
Main advantage	Payment security and predictability	Initial rate often lower, potential savings
Main disadvantage	Generally higher rates	Risk of higher payments if rates rise
Flexibility	Low flexibility: no change even if the market falls	Flexible: can be lowered if interest rates fall
Market adaptability	Protects against future rate hikes	Advantageous in times of falling interest rates
Best for	Buyers looking for long-term stability	Those who take risks to potentially save money.
Risk	No profit when rates fall	Risk of higher payments if rates rise

Which rate to choose for borrowing in 2024

– Preference for security: If the borrower prefers stability and budget security, a fixed rate is probably more suitable.

– Risk-taking and anticipation of rate cuts: If the borrower is prepared to take a certain risk and believes that rates will fall (as some economists predict), a variable rate could save money over the long term.

The risks associated with these new measures

The new measures, by increasing households’ borrowing capacity, are likely to stimulate demand for housing without solving the shortage of supply that already exists in some major Canadian cities.

This increase in demand could exacerbate the rise in property prices, as the number of available homes does not keep pace with buyers’ appetites.

Risk of domino effect: when purchasing capacity increases without a corresponding supply, this often translates into upward pressure on prices. This dynamic is particularly risky in tight markets where the supply of housing is already limited.

Extended debt: long-term costs of 30-year amortization

Although extended amortization to 30 years reduces monthly payments, it does come with a cost. In fact, the longer the loan repayment period, the higher the total amount of interest paid.

Example: A 25-year, $500,000 loan at 5% would involve monthly payments of $2,908, with total interest costs of $372,354. If the same amount is amortized over 30 years, monthly payments would drop to $2,684, but total interest costs would climb to $466,279 – a difference of nearly $100,000 over the life of the loan.

This means that borrowers will accumulate more debt over the long term, which could pose problems if interest rates rise or the economy goes into recession. This leaves families with financial commitments over a longer period, increasing their exposure to future economic hazards.

Conclusion

The recent mortgage measures, which will take effect in December 2024, will have a deep impact on the Canadian real estate market. These changes are designed to improve affordability, notably by extending amortization to 30 years and reducing the minimum contribution to 5% for properties up to $1.5 million. These adjustments allow households to increase their financing capacity, making homeownership more affordable in the short term, while creating opportunities for first-time buyers and investors.

However, these measures also present risks. Increased borrowing capacity could stimulate additional demand, which could exacerbate the rise in property prices. What’s more, although monthly payments are lower with longer amortization, buyers expose themselves to higher interest costs over the life of the loan.

Finally, the choice between fixed and variable rates will be crucial for borrowers in 2024, with interesting opportunities on the variable rate side if the anticipated fall in rates is confirmed.

In conclusion, these new measures represent a double opportunity: improved housing affordability for buyers, and investment opportunities for real estate professionals. However, it will be essential to remain vigilant in the face of the risks associated with low inventory, rising prices and prolonged indebtedness.

If you’re interested in real estate in Montreal, trust our team of real estate brokers.

Kyle Shapcott

kyle@equipels.com

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Kyle has been an expert on the real estate market for over 10 years. He is passionate about Montreal and the city’s real estate sector, and regularly shares his analysis and advice in his articles.

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