In this previous episode, we discussed an interesting phenomenon in real estate.
When housing prices go up, they typically happen very quickly.
But when housing prices come down, they tend to do so at a much slower pace.
One of the reasons why prices have support at the bottom is because of government interventions.
The Bank of Canada has cut the interest rate 3 times since June, but obviously that’s too little too slow to revitalize the housing market.
So, here comes the Trudeau government.
They are going to boost housing demand with what they called “the boldest mortgage reforms in decades to unlock homeownership”.
Both existing homeowners and first time buyers will benefit from them.
What are the changes?
Are they going to have positive or negative effects on the market?
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Let’s start by talking about first time buyers, then we’ll talk about existing homeowners.
There are 2 important changes for first time buyers.
#1 30-Year Amortization
Starting August 1 this year, first time home buyers can extend their mortgage payments over 30 years instead of the standard 25 years.
This will help first time buyers reduce their monthly mortgage payments.
For example, on a $500,000 mortgage at a 5% interest rate, a 30-year amortization could lower monthly payments by over $200 compared to a 25-year term.
The lower monthly payments also make it easier for first time buyers to qualify for a mortgage.
Previously, the 30-year amortization was only allowed for newly built homes.
But how many first time buyers would purchase a pre-construction home?
Not very many at all, there are too many uncertainties for them.
So, effective December 15, 2024, the 30-year amortization will be allowed for resale properties as well.
#2 $1.5M Insured Mortgage Cap
The insured mortgage cap sets the maximum home price eligible for mortgage insurance when the buyer’s down payment is less than 20%.
Since 2012, this cap has been set at $1 million dollars.
Nowadays with one million dollars, choices could be limited, especially in cities like Toronto and Vancouver.
So the government is going to increase the cap to allow more properties to qualify for insured mortgages.
Also effective December 15, 2024, the insured mortgage cap will be increased from $1M to $1.5M dollars.
What does this actually mean?
Let’s say we are going to purchase a $1.5 million dollar home.
If a 20% down payment is required, we would need $300,000 readily available to buy this home.
With the new policy, we can now take advantage of a reduced down payment with mortgage insurance.
We need to put 5% down on the first $500,000, that’s $25,000.
Then 10% down on the remaining $1 million, that’s $100,000.
So the total down payment we need is only $125,000, versus $300,000.
The difference is $175,000 of upfront down payment.
That’s very significant.
People struggle the most coming up with the big lump sum payment upfront.
It takes too long to pile up savings.
Most people can actually manage the monthly payments, they just don’t have the down payment.
So the $1.5 million dollar price cap, together with the 30-year amortization, will solve this exact problem.
The increased cap is particularly helpful for first time buyers, but it will also be accessible for all home buyers and not just limited to first time buyers.
Now let’s talk about existing homeowners.
The biggest challenge we need to face is mortgage renewals.
Roughly 2.2 million mortgages are up for renewal in 2024 and 25.
Many people may face a payment shock because the current interest rate is much higher than the rate they previously locked into.
If people cannot afford the higher payments, they may be forced to sell their properties.
There is a potential risk of an increased number of distressed sales.
The Government knows very well about that and of course they want to prevent that from happening.
So they come up with some creative changes.
Previously, if you have an existing mortgage and you want to jump to another lender for a renewal because they have a better rate, you have to re-qualify with the stress test.
So most people would just stick with the current lender because it is too much work and effort to switch.
Effective November 21, 2024, if you want to renew your mortgage with a different lender at a better rate, you no longer need to be requalified with the stress test.
So it will just be a straight switch, essentially, the same mortgage but under a new lender.
This is going to have significant implications.
When people are free to switch around, what’s going to happen?
Fierce competition among the lenders.
They have to offer more competitive rates and incentives to attract new customers and to retain old customers.
You see, the government is very smart in creating competitions.
Now the homeowners will benefit and their costs will be reduced.
The 5 year fixed mortgage rates are already coming down to below 4%.
With further rate cuts expected and the removal of stress tests when switching lenders, the mortgage renewal crisis will likely be resolved.
So what’s your biggest takeaway from our government’s “boldest mortgage reforms”?
I would say it is the government’s intention to stabilize the housing market.
The housing market plays a significant role in Canada’s overall economy and the government cannot let the ship sink.
For many Canadians, their home is their biggest investment, a drop in home values would impact their household wealth.
They will have less money to spend and it is going to have a ripple effect on the overall economy.
Worse yet, many people have their retirement plans dependent on their home equity.
A sharp decline in home prices could erode their retirement plans and that’s going to be a huge problem for the government with our aging population.
And if there are issues with distressed sales and defaults, the stability of our financial system would be impacted.
You see, the government is going to do all they can to prevent the market from crashing further.
Do you think the government’s new changes are going to boost the housing market?
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