The Decibel - The rules for buying a house are changing

Episode Date: September 23, 2024

Last week, the Liberal government announced they’re bringing in new mortgage rules to help first-time buyers get into the market. The changes would help buyers to get into the market with lower down payments and lower monthly payments, but can mean more interest in the long run. Rachelle Younglai is the Globe’s real estate reporter. She’s on the show to talk about what these changes mean for buyers, and what effect they might have on the housing market.Join Globe reporters Rachelle Younglai and Erica Alini for a live Q&A and ask your questions on new mortgage rules on Monday September 23 at 12 p.m. ET: tgam.ca/new-mortgage-rules

Last week, the federal government announced new mortgage rules. Ones that could change who can finally get into the housing market. We need to help millennials. We need to help Gen Z. Canada needs to be a place where the dream of home ownership is alive. To understand exactly what this means, I'm speaking with Rachel Younglie, The Globe's real estate reporter. She'll explain how these new rules work, who they'll help, and what first-time homebuyers should consider before getting into the market. I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail.

Rachel, thanks so much for being here. Thanks for having me. So why did the Liberal government introduce these new mortgage rules last week? Well, they recognize that housing, home ownership, and rental is not affordable, and that a large percentage of younger Canadians just cannot buy a home and cannot afford their rent. So there is like that practical side. But of course, there's also the political calculation, right, of what younger voters care about. Yeah, absolutely.

They are catering to younger voters for sure. They've been doing that throughout their entire time in office. This is the number one issue for young Canadians is housing, housing affordability. Yeah, let's talk about that because it is really hard for a lot of people, especially young people, to get into the current housing market. So just set the scene for us, Rachel. What are the average home prices in Canada today? Yeah, they're very high. The average home price across the country is around $650,000 in the major cities. So in Toronto and southern Ontario, the average price is over a million dollars. In Vancouver and the lower mainland in BC, it's over a million dollars there too. So it's really, really unaffordable for many Canadians.

And on the rental side, rental rates are also quite high. A one bedroom, the average one bedroom is close to $2,000 across the country and higher, of course, in Toronto and Vancouver. Wow. Yeah. So this is obviously something that the federal government is trying to address. So let's talk about what they've decided to do. What exactly are the new rules that were announced last week? So what they're trying to do is make it easier for younger Canadians to buy a home. So the first thing they did was they extended the number of years that you can pay back your loan. So right now, the maximum number of years that you have to pay back your loan if you take out an insured mortgage is 25 years. And so they lengthen that by another five years. So now the maximum number of years that you have to pay back your insured mortgage is 30 years. So that's the first thing they did is they raised the insurable amount of the mortgage. So now you can get an insured mortgage on a property that costs up to $1.5 million.

And under old rules or rules soon to be expired, the maximum amount is $1 million. And so that is an important threshold because right now, if you pass the million dollar threshold, so if your property costs more than a million dollars, then you must come up with a down payment that is 20% of that. So 20% of that is $200,000. And that's a lot of money for anyone to come up with for a down payment. Yeah, exactly. And we're going to break down those mortgage details in a sec. I think we should just lay out the timeline here, right? Because these rules aren't in effect quite yet, right? Rachel, when are we actually going to see this happen? They are due to take effect December 15th. And that's right ahead of the busy spring

buying season. So it's right before the spring market. And we are still, I guess, kind of waiting on some details of this. Like we don't have all the technical details. Is that right? Yeah, that's right. We don't know exactly how it's going to work yet. We have an idea of how it'll work. But we're waiting for the federal government to come up with some details on exactly what the size of a down payment will be for homes that are priced over a million dollars.

So homes priced between a million dollars. So homes priced between a million and a million and five. Okay. It's only been a few days since this announcement has been made. Do we have a sense of how people have responded to this, like realtors, potential buyers? What's been the reaction? Okay. So in the first 24 hours, I would say that the reaction was quite positive from the real estate industry. And they were getting a lot of calls, they're still getting a lot of calls about how's it going to work? How's it going to affect my down payment? How's it going to affect my monthly payment? And this means that now maybe I can buy a house that's just over a million dollars, or maybe my payments are going to be not as much under these new rules. So a lot of excitement from realtors, a lot of excitement from mortgage brokers.

So I would say the real estate industry is, they're excited for this. And I would say as the days have gone on, that we're hearing from first time homebuyers and other buyers and homeowners who believe that this will push up home prices. So there's concern about that. Okay. So we're going to get into the details of the new rules. But first, let's just establish the current state of things. So remind us, Rachel, how much do homebuyers in Canada need for a down payment under the current rules today? If you buy a property that is less than $500,000, you are required to put down a minimum down payment of 5%. So say your property that you want to buy is $500,000, your minimum down payment on

that is $25,000. Okay. And then what if your property is more than $500,000? hundred and a million is there's a minimum down payment of 10%. So say on a house that's priced at $600,000, the first 5% on the $500,000 is $25,000. And then the rest, the rest $100,000, 10% on that, an extra $10,000. So in total $35,000 minimum down payment for a home that's priced at $600,000. Okay, I think that makes sense. We can see that broken down for a house that's about $600,000. A lot of numbers, but this is actually very clear here, Rachel. Okay, so things change a little bit when you hit a million dollars for a house, right? So what do you need for a down payment

at a million dollars? So at a million dollars, that is when you are required to put down a minimum of 20%. So once you cross that threshold into a million dollars, you must come up with $200,000 for your down payment. Which is a big jump from the numbers we were just talking about, right? It's a huge jump. Yeah. That's really hard for a lot of people. Okay. And then the other difference, of course, for anything less than a 20% down payment, you also need to purchase mortgage insurance, right? So how does that work? Right. So when you put down less than 20%, you must get mortgage insurance.

It's calculated as a percentage of your loan. It benefits the lender. It's in case you as the homeowner cannot make your mortgage payment, you default on your loan. It benefits the lender. It's in case you as the homeowner cannot make your mortgage payment, you default on your mortgage, then your lender, your bank continues to receive the payments. That's what insurance does. It protects the bank. It protects the lender. Okay, so we've established that kind of the current state of things. Let's now talk about the effect of one of these new mortgage rules. So one of these new rules is that the cap on insured mortgages would be raised from $1 million to $1.5 million. So this

is a house costing that much money. So what effect does that change now have? And again, I was just saying that we don't have all the rules yet. We don't know exactly what the down payment requirement is going to be, but it's going to be less than 20%. So you're not going to have to come up with $200,000 for a property that costs a million dollars. It will be less than that. So it's going to be easier to save for a down payment because you won't have to reach that $200,000. Yeah. So that difference could be, you know, now maybe you only have to put $80,000, something in that ballpark for a million-dollar house instead of $200,000.

Yes, yes. Which is a big difference for a lot of people maybe in the markets we're talking about, the big cities where houses are kind of, they have said for a long time, and they're not wrong, that the average price of a home is so much more today than it was in 2012 or even 10 years ago. So it just makes sense that mortgages will be insured up to a higher amount because home prices are so much more than they were 10 years ago. We'll be right back. All right, so we've gone over the first mortgage change. Rachel, let's talk about the second change now.

This is the one that allows first-time homebuyers to take out 30-year mortgages. So how is this going to change things? It has the effect of lowering your monthly payments because if you stretch out your payment over a longer period of time, then you're just paying less. So when people talk about this will make it more affordable to buy a home, yes, it does make it more affordable in the near term because you will be paying less per month because your payment is stretched out over 30 years instead of 25 years. So, yeah, so each month you're paying less. Is there a risk to that, though, because you are, I guess, drawing it out over a longer period of time? Yeah, I mean, the flip side of it is that because your mortgage term is 30 years instead of 25 years,

that means you're going to be paying more interest because your loan is amortized over a longer period of time. Okay. So we've been talking about this at the concept level, Rachel, but let's actually go through some concrete examples then to see what these new changes could mean for people who might be looking to buy a home, right? So like we established off the top, outside of major cities, the average house price in Canada is about $650,000. So if someone's trying to buy that house under current rules, let's break down what they would be paying. Yeah, so if someone was buying a $650,000 home. And say they put down a down payment of 10%. So that means their mortgage is about $585,000. And let's look at how much they would be paying over a 25 year period, which right now is the maximum amortization period for an insured mortgage. And so when we run the numbers on that, they would be paying about $3,100 a month.

Okay. And I would just add one caveat is that mortgages renew probably about every three to five years. And so your mortgage terms will change. And of course, you're paying down the loan. So it will affect how much you're paying. But initially, you're paying $3,100 a month. Okay, so under current rules, $650,000 house that you're buying, yeah, your mortgage payments would be about $3,100 a month. Let's look at the new rules then, Rachel. So the new rules would be a 30-year mortgage, so a little bit longer. How would that monthly payment change? Right. So when you look at how much you'll be paying over 30 years, actually you're going to be paying about $300 less. So your monthly mortgage payment will be around $2,800 instead of $3,100.

Okay, so the monthly payment would be less. What about the total interest that they end up paying over the life of the mortgage, right? Because the issue, of course, is that you've extended how long you're paying this for. So you would be essentially paying more interest, right? How does that change? Under the 25-year mortgage, the total interest paid on that mortgage amount would be around $350,000. Okay. And then under the new one, the new rules? And under 30 years, the total interest paid would be around $430,000. So that's kind of the catch. Each month you're paying less money, but over the longer period of time, you're paying way more in interest. Yes, that's the catch. Yeah.

Okay. Okay, so let's also go through this for a million-dollar home, right? So this is something you're likely to find in a big city like Toronto or Vancouver. Our colleague, Erica Alini, had an example done with the comparison site, rateup.ca. So we're going to use this. So if a house costs a million dollars, Rachel, what does a down payment look like currently? So under the current rules, your down payment on a million dollar house is a minimum of $200,000. And under the new rules, then what would that be? We don't know exactly what the rules are going to be. But if we take the new rules, then, what would that be? We don't know exactly what the rules are going to be. But if we take the current rules, which is 5% on the first $500,000, and then 10% on anything above $500,000, so going up to a million dollars, the minimum down payment would be around $83,000. That is a huge difference, right?

To get into the market with like $83,000 instead of $200,000? Wow. Yeah, that's a huge difference. Yeah. And $83,000 instead of $200,000? Wow. Yeah, that's a huge difference. Yeah. And then let's look at how your monthly rate would change then. So on a million dollar house, what would you, under the current rules, what would you have to pay each month? With a mortgage, that's around between $800,000 and $900,000. Under the current rules, your monthly payments would be close to $5,000. And I should say that these calculations are done by rate hub, and this is what they came up with. Okay, $5,000 a month.

Under the new rules, which is like a 30-year length of time then to pay back the mortgage, how would that change? Now, let's just remember that we made a much lower down payment on this property. That's a million dollars. So your mortgage size is going to be a lot bigger. Your mortgage size is probably over a million dollars. And with that in mind, your monthly payment is also close to $5,000. Okay. Okay. So that's where the difference actually kind of shakes out there then. So your monthly payment would kind of stay the same. Yes, yes. Okay. So that breaks it down for each month. What about over the entire length of the mortgage, Rachel? Because we talked

about how much bigger your loan is, right? So what do you end up paying in interest over the whole length of your mortgage if you're paying over 30 years? Yeah, yeah. I mean, you're going to be paying more in interest for sure. And according to RateHub's calculations, you'd be paying about $145,000 more in interest. Okay. So that's something to keep in mind then, that you're going to end up paying more money in the long run again. Yes. Yes, you will be. So from breaking down those numbers, these are pretty significant changes then.

They certainly could be for a lot of people trying to get into the market. How could this affect the housing market, kind of broadly speaking? You will definitely see more buyers enter the market, because obviously it'll be easier to make your monthly payments, and you can buy a property up to $1.5 million with an insured mortgage. So you'll see more buyers, more first-time homebuyers enter the market. And that will result in more competition. So more competition means that there is a potential for home prices to go up.

So more buyers will be able to buy a home, but that also means more competition. Okay. I wonder, are there any, I guess, any risks to these new kind of rules? Because essentially, this would be allowing people with less money to buy expensive houses, right? So could that get us into trouble in the long run? Yeah, I mean, it definitely does increase your household debt. We already have some of the highest levels of household debt amongst the G7 countries. So yeah, we're a pretty indebted country. So yeah, it drives up household debt. We've been talking about buying, but let me ask you about the rental market too. Could we expect to see changes in the rental market as a result of these new rules? Yeah, we could. So if renters are able to now get into

the home ownership market and buy a home, that means that they will leave their rental place, their apartment, their condo, and free up a rental for someone else. So in that way, yes, it could have an impact on the rental market. So if a large percentage of renters buy homes, that opens up new rentals. And that could potentially also have an effect on pricing where rental rates will come down because there's less demand for rentals. Just in our last few minutes here, Rachel, let me also ask you about interest rates because we talk about this a lot when we talk about housing, right? We know they have a big impact on people's mortgage payments. The current interest rate is 4.25%. And we are expecting it to probably drop again this fall. How could the changing interest rate actually affect things here? Oh, yeah. I mean, we're expecting more interest rate cuts. And we're heading into, I mean, we were expecting more interest rate cuts and we're heading into, I mean, I know

we're in the fall right now, but traditionally the busiest time for real estate sales is in the spring. And so in a way, we're kind of setting ourselves up for a busy spring market because the cost of borrowing is going to be lower and we're going to have these new rules in place for that. So according to realtors and the real estate industry, it's going to be a busy,'re going to have these new rules in place for that. So according to realtors and the real estate industry, it's going to be a busy, busy, busy spring. Wow. So just before I let you go here, Rachel, if you're a potential buyer listening to this,

you know, maybe a young person trying to buy that first home, what should your big takeaways be from these new rules? Yeah. I mean, you now have a few more options or ways to get into the market because now you have a longer period of time to pay down your mortgage and you can potentially make bids on a higher priced home, something about more than a million dollars. But then you also have to know there's a trade off there, too, and that you'll be paying more in interest over the long term, and you'll be in debt for longer because your mortgage term will be longer. Rachel, thank you so much for taking the time to go through all of this and for being here today. Thank you. That's it for today. I'm Mainika Raman-Wilms. Today's episode was edited and mixed by Ali

Graham. Our producers are Madeline White, Michal Stein, and Ali Graham. David Crosby edits the show. Adrian Chung is our senior producer, and Matt Frainer is our managing editor. Thanks so much for listening, and I'll talk to you tomorrow.