Canada plans to extend the mortgage payment period to 30 years for first-time home buyers of newly built homes, aiming to aid younger consumers and stimulate the housing supply. Finance Minister Chrystia Freeland announced the move, part of the upcoming federal budget, to make monthly payments more manageable. However, experts warn of potential consequences, including driving up home prices and wealth transfer implications. Despite intentions to address affordability, concerns remain regarding the policy's broader impact on the housing market.
Canada's decision to extend the mortgage payment period to 30 years for first-time home buyers of newly built homes, effective August 1, was announced by Finance Minister Chrystia Freeland last week.
This proposed move, part of the upcoming federal budget, is intended to assist younger consumers in managing their monthly mortgage payments and stimulate new housing supply, as emphasised by Freeland during her remarks to reporters in Toronto.
In Canada, home loans typically come with an interest rate that is subject to renewal every three or five years within the set amortisation period. This stands in contrast to the U.S., where a fixed-rate mortgage entails an interest rate that applies for the entire duration of the loan.
The significant interest rate increases since 2022 have presented challenges for Canadian mortgage holders, who have had to choose between extending their mortgage period to maintain steady payments or increasing their monthly payments. Additionally, a supply-demand imbalance in the housing market has posed obstacles for first-time buyers, while major banks have adopted more cautious lending practices, increasing their loan loss provisions to cover unpaid loans and mortgages.
Freeland emphasised that extending the amortisation period would make monthly mortgage payments more affordable for young Canadians seeking their first home.
Moreover, the budget will propose increasing the withdrawal limit of the Home Buyers' Plan, allowing Canadians to withdraw funds from a registered retirement savings plan, from CAD 35,000 to CAD 60,000. This measure aims to make a down payment more attainable for younger Canadians.
However, some experts have raised concerns that extending the amortisation period could potentially drive up home prices, offsetting affordability gains. Rob Gillezeau, an economics professor at the University of Toronto, cautioned that this policy change might transfer wealth from younger Canadians and newcomers to older, high-wealth Canadians. He noted that similar federal policy changes since 2015 have focused on addressing housing issues through political messaging but may have inadvertently exacerbated the housing crisis by boosting demand.
In conclusion, while the extension of the mortgage payment period aims to enhance affordability for first-time home buyers, concerns persist regarding its potential impact on housing prices and wealth distribution.
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