Mortgage changes: Cheaper entry into housing market at steeper costs

The federal government released details of its mortgage reform plan on Tuesday, outlining changes to eligibility for smaller down payments and extended amortization periods.

The Department of Finance said two key changes would be implemented by Dec. 15, 2024:

• Increasing the existing $1 million price cap for insured mortgages to $1.5 million
• Expanding eligibility for 30-year mortgage amortizations to first-time buyers and buyers of new builds

This means more home buyers are eligible for lower down payments and extended loan repayment periods.

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It’s a move that would lower the barrier to entry into the housing market and drop monthly payments — but also one that would increase the overall cost of repaying a mortgage for those taking advantage of the relaxed requirements.

Here’s how the numbers break down:

New down payment cap

Previously, anyone purchasing a home for more than $1 million was required to front a minimum 20 per cent down payment to qualify for an insured mortgage.

That cap is being increased to $1.5 million, opening access for those in cities like Toronto and Vancouver, where average homes eclipse the million-dollar mark.

Those buyers now have the option to pay a lower down payment, following the existing structure for homes under $1 million, which is five per cent of the first $500,000 plus 10 per cent of the remaining cost between $500,000 and $1.5 million.

That’s a significant change for homes between $1 million and $1.5 million — one that lowers the price of a minimum down payment by more than $100,000.

Home prices vary from province to province, and so does the minimum amount needed to purchase an average home.

Longer amortizations

The second change is to mortgage amortization length. Mortgages are structured so that the loan is paid off in equal installments, usually over 25 years. A longer amortization period means lowered monthly costs — but more time for interest to accrue.

Previously, for those with down payments less than 20 per cent, the maximum allowed amortization was 25 years. Under the government’s new plan, first-time home buyers and those purchasing a new build qualify for a 30-year amortization without needing to meet that 20 per cent threshold.

Stretching the repayment period can lower monthly mortgage costs by hundreds of dollars.

But while monthly costs decrease, the overall cost of repaying a mortgage rises significantly.

For example, someone paying for an average home in British Columbia with a minimum down payment at a 5 per cent interest rate could lower payments by around $400 per month on a 30-year mortgage compared to a 25-year mortgage.

But at the end of their amortization, that person will have ultimately spent approximately $150,000 more in interest on their loan.