Feds Raise Insured Mortgage Cap, Expand 30-Year Amortization

“By raising the limit to $1.5 million, effective December 15, 2024, the Government of Canada is bringing the [mortgage default insurance] program in line with current housing market realities, enabling more Canadians to qualify for a mortgage with a down payment that is less than 20% and expanding access to the cost savings and security that comes with mortgage loan insurance.”

Source: “The Boldest Mortgage Reform in Decades” Backgrounder, Government of Canada 

When you purchase a home, you are required to make a down payment. The minimum down payment required is based on the property’s purchase price. Under the current rules, the minimum down payment is as follows:

If your down payment is less than 20% of the purchase price, you are required to get mortgage default insurance that covers your lender in case you can’t make your payments. This makes your mortgage a high-ratio or insured mortgage. Mortgage rates for insured mortgages are typically lower than uninsured mortgages because they are less risky for the lender.

However, presently homes over $1 million are not eligible for mortgage default insurance and borrowers must make a 20% down payment. The difference in the down payment requirement is staggering.

Under the current rules, assuming a 25-year amortization, here is the difference between a home below and above the current mortgage cap:

While the mortgage payments are higher for a $995,000 home, the minimum down payment is $74,500, compared to $200,000 for a $1 million home.

As of December 15, 2024, the new minimum down payment cap will be increased to $1.5 million, meaning homebuyers will qualify for an insured mortgage up to that amount. The government later confirmed on September 24, 2024, that borrowers will pay 10% on any portion between $500,000 and $1,499,999.

Benefits of Expanding the Insured Mortgage Cap

• Borrowers in expensive markets such as Toronto and Vancouver where home prices are typically over $1 million will now have access to insured mortgages
• Insured mortgages offer lower interest rates than uninsured mortgages
• Lower mortgage rates reduce the threshold for the mortgage stress test
• Borrowers can access more expensive homes with a lower down payment

“Given inflation and interest rates have fallen, the government is expanding access to lower monthly mortgage payments to all first-time homebuyers and to all buyers of new builds, effective December 15, 2024—reducing the cost of monthly mortgage payments and helping more Canadians afford to buy a home. This will unlock the dream of homeownership for more first-time buyers, while also further incentivizing the construction of more new homes.”

Source: “The Boldest Mortgage Reform in Decades” Backgrounder, Government of Canada 

First announced in the federal government’s Budget 2024, as of August 1, 2024, first-time homebuyers of newly-built homes became eligible for 30-year amortizations on insured mortgages. Previously, the maximum for an insured mortgage was 25 years.

However, critics argued that this legislation was too restrictive because it only applied to buyers of new homes.

As of December 15, 2024, a 30-year amortization will be available to:

• All first-time homebuyers of any kind of home (new or resale)
• All buyers of newly-built homes

What Is a Mortgage Amortization?

Your mortgage amortization is the amount of time it takes to pay off your mortgage in full. The longer your amortization period, the lower your mortgage payment; conversely, the shorter your amortization period, the higher your monthly payment.

Under current mortgage rules, if you make a down payment of less than 20% of the purchase price of your home, you’ll need mortgage default insurance. The maximum amortization for insured mortgages is currently 25 years, unless you are a first-time homebuyer purchasing a newly built house.

Under the new rules, the maximum amortization will be extended to 30 years. Extending your amortization lowers your mortgage payments. For example, assuming a $450,000 mortgage with a 4.5% interest rate and five-year term, here’s how the monthly payments compare with a 25-year amortization compared to a 30-year amortization:

Another benefit to lower monthly payments with a longer amortization is that borrowers can qualify for a higher mortgage amount and therefore be able to purchase a more expensive home. When you apply for a mortgage, lenders calculate the maximum payment amount you can afford based on your income and other expenses. A lower mortgage payment potentially means you qualify for a larger loan.

According to a September 16, 2024, Hot Charts release by economists Stéfane Marion, Daren King and Kyle Dahms at the National Bank of Canada, “Extending the maximum amortization period from 25 to 30 years while opting to keep monthly payments unchanged will increase the purchasing power of borrowers making a minimum down payment by 9.7%, ranging from $22,106 in New Brunswick to $51,565 in Ontario. Alternatively, homebuyers could take a more disciplined approach by opting for a 30-year amortization, which would lower their monthly payments by 8.9% for the same home, yielding savings ranging from $107 in New Brunswick to $248 in Ontario.”

Benefits of Expanding Eligibility for 30-Year Mortgage Amortizations

• All first-time homebuyers are now eligible, not just first-time homebuyers of new builds
• All buyers of newly-built homes are eligible
• With a longer amortization period, mortgage payments are 8.9% lower
• If mortgage payments stay the same, purchasing power will increase 9.7% with a longer amortization period (meaning borrowers can afford more home)
• Developers will be incentivized to build more new homes, which will help tackle the housing crisis due to low supply

While these changes are framed to make housing more affordable, there are some perceived shortcomings to these mortgage reforms, namely that they could actually stimulate too much activity on new builds and drive prices up.

“There is a risk that this simply stimulates homebuying demand, puts more pressure on prices and ultimately makes affordability worse over the longer run,” said Marc Desormaux, principal economist with Desjardins, to CBC.

In addition, it will take time for developers to build enough new homes to improve supply and make first-time buying more affordable and accessible.

What’s more, while a longer amortization period makes mortgage payments more affordable, it also greatly increases the interest borrowers pay over the course of their loan. Using that same $450,000 mortgage with a 4.5% interest rate and five-year term, here’s how the interest paid over the entire mortgage compared with a 25-year amortization compared to a 30-year amortization:

With the longer amortization, a homeowner will pay almost $70,000 more interest over the 25-year amortization. While interest rates will change over the lifetime of the mortgage, this example illustrates that a longer amortization can potentially raise homeowners’ debt burdens.

Given the high cost of housing, particularly in British Columbia and Ontario, where prices over $1 million are not uncommon, legislation that helps first-time homeowners enter the market is welcome news. However, it remains to be seen whether these reforms will actually have the desired effect.