Ottawa’s proposed mortgage changes may well give first-time homebuyers a near-term boost in affordability, but could also stoke vulnerabilities in the Canadian economy, a TD Bank economist argues.
Rishi Sondhi penned an analysis of the Liberal government’s plans to expand the availability of 30-year amortizations to all first-time homebuyers and on all new builds, as well as to raise the price cap for insured mortgages to $1.5 million, up from $1 million today. Both changes are set to come into effect on Dec. 15.
Longer amortizations help would-be buyers qualify for larger mortgages by reducing the monthly carrying costs of the loan.
For the typical homebuyer, Sondhi estimates the expanded 30-year amortizations will lead to an increase in purchasing power of around nine per cent.
Sondhi projects that the pair of moves aimed at loosening mortgage conditions in Canada will help stimulate homebuying in the first half of 2025. He expects that both sales and home prices will be two to four percentage points higher by the end of 2026, were it not for Ottawa’s mortgage changes.
But Sondhi told Global News in an interview Thursday that, thanks to rising prices tied to the policy itself, the initial bump in affordability tied to longer amortizations will be “completely eroded” in the next two years.
“It’s a bit of a double-edged sword there,” he said. “They do get that near-term boost to activity. But at the same time, affordability is worse than it would have been absent these policies, which then limits the impact.”
Raising the insured mortgage cap to $1.5 million will allow for more Canadians to access more expensive homes without having to put 20 per cent down upfront. Putting down less than that amount for a home allows a buyer to qualify for an insured product, but is also considered a higher loan-to-value mortgage.
Sondhi’s report estimates that roughly one in five homes in Canada are currently valued between $1 million and $1.5 million.
The biggest impact from the higher insured mortgage cap will likely be felt in Toronto and Vancouver, according to the TD Bank analysis, where the bulk of the homes in that price range can be found.
Finance Minister Chrystia Freeland has defended the Liberal proposals as intentionally giving first-time homebuyers a “leg up” in the housing market.
But for a policy looking to stimulate ownership among first-time homebuyers, Sondhi wrote that the proposals “miss the mark.”
Canadians looking to break into the housing market for the first time rarely have the levels of income needed to qualify for such sizable mortgages, Sondhi explained. A household looking to buy a property worth $1.45 million would need more than $225,000 in annual income to qualify for the mortgage, he calculated.
That’s “a stretch for many households, let alone first-time buyers,” Sondhi said.
Policies that will result in more high loan-to-value mortgages can also add some “fragility” to the Canadian financial system, Sondhi argued in his report.
He cites Bank of Canada research that shows higher loan-to-value ratios make homeowners more prone to defaulting on their mortgages.
Longer amortization periods also affect Canadians’ abilities to absorb sudden financial shocks, Sondhi says. Whereas those with 25 years or less remaining on their mortgages can lengthen those amortizations as a way to mitigate rising rates, starting from 30 years limits a household’s ability to extend the payback period and cut down on monthly costs.
Canada already has a highly indebted society, Sondhi noted, and these polices could see debt levels rise.
Measures that encourage more Canadians to take on higher-risk loans could intensify the risks to the financial system if a downturn were to hit the economy and household incomes take a hit, he said.
“They are factors that can amplify a recession,” he said. “It definitely raises the vulnerability in the financial system, but sort of the broader economy as well.”