Houses are shown in the Vancouver Kitsilano neighbourhood on Oct. 3, 2022.JONATHAN HAYWARD/The Canadian Press
The federal government is encouraging young people to dig themselves into housing debt.
New mortgage rules that took effect in mid-December – including expanded eligibility for 30-year insured mortgages – are being billed by Ottawa as the boldest reforms in decades.
The changes are ostensibly designed to help consumers, especially millennials and Gen Zs, realize their dreams of home ownership by lowering the cost of down payments and monthly mortgage bills.
But they will also cause younger homeowners to rack up mortgage debt, pay more interest and leave them in hock longer than previous generations – all while needlessly exposing taxpayers to more real estate risk.
As of Dec. 15, the price cap for insured mortgages was increased to $1.5-million, up from $1-million, enabling buyers to purchase costlier homes with smaller down payments.
Homebuyers must pay for mortgage insurance – which reimburses a lender if a borrower defaults on a loan – if a buyer makes a down payment that is less than 20 per cent of a home’s total purchase price.
The government is also making 30-year amortizations available to all first-time homebuyers and all buyers of new builds, allowing them to make smaller monthly mortgage payments by giving them an additional five years to pay off their home loans.
Don’t be fooled. These relaxed mortgage rules mean that young people will be weighed down by debt for longer and end up paying more interest before their home loans are repaid in full.
“There’s no free lunch,” Bank of Canada senior deputy governor Carolyn Rogers warned during a speech at the Economic Club of Canada in November.
“Steps to reduce the short-term cost of mortgages for borrowers can increase their long-term costs.”
Stretching a mortgage’s amortization from 25 to 30 years could shave money off a monthly payment but result in tens of thousands of dollars of additional interest costs over the life of a mortgage, she said.
That sounds like a great deal for banks, but a rip-off for first-time homebuyers.
Looser rules for insured mortgages are also unfair to taxpayers.
Mortgage insurance is backed by the federal government. That means a higher price cap for insured mortgages creates more risk for taxpayers, who serve as the ultimate backstop for those higher loan-to-value home loans.
Ms. Rogers estimated that one in four mortgages in Canada is insured at origination. As a result, approximately $590-billion in outstanding mortgage debt is backed by the federal government.
Back in 2012, the maximum purchase price for insured mortgages was set at less than $1-million to limit taxpayer exposure to housing market risks.
The government’s new policies also have the potential to worsen this country’s housing affordability crisis.
Home prices were already expected to head higher because of falling interest rates. The introduction of laxer mortgage rules will further inflate home prices by stoking demand from financially stretched borrowers.
Fiddling with the rules for insured mortgages also does nothing to address housing supply constraints, a key variable affecting home prices.
“Improved housing affordability requires a better balance between supply and demand, and achieving this balance will take time,” Ms. Rogers stressed in her address.
“In the meantime, leaning too much on measures that reduce the short-term cost of financing could have long-term impacts on the financial health of households, the mortgage market and the economy.”
If the high cost of mortgage payments is a barrier to home ownership, then the government also ought to incentivize Canadians to save more of their money rather than accumulate more housing-related debt.
After all, larger down payments are the financially prudent way for consumers to lower their monthly mortgage costs and avoid becoming house-poor.
Ottawa could help by increasing the annual and lifetime contribution limits, currently set at $8,000 and $40,000, respectively, for tax-free first home savings accounts.
The current contribution limits are far too low. When was the last time that $40,000 was considered a sizable down payment in this country?
Recent data suggest that Canadians are finally getting into the habit of saving more of their disposable income. The household savings rate was 7.1 per cent in the third quarter of 2024, according to Statistics Canada.
But gathering economic headwinds, including an elevated unemployment rate and U.S. president-elect Donald Trump’s threat of punitive tariffs, suggest that Canadians, especially homeowners, may need to amass bigger rainy-day funds.
Although household debt burdens have improved in recent quarters, Canadians are still shouldering a lot of leverage.
The ratio of household credit market debt as a proportion of household disposable income was 173.1 per cent in the third quarter. That means for every dollar of disposable income Canadian households earned, they held $1.73 in credit market debt, which includes mortgage and non-mortgage loans.
But mortgage debt is good debt, right? Sure, but only if one can reasonably afford to buy and maintain a house.
Our legislators are doing young people a disservice by offering them shortcuts to home ownership. Is this the financial advice they would offer their own kids?
The only people who are house-rich are the ones who are mortgage-free.