Canada’s New Mortgage Rules: What They Mean for the Housing Market in 2025 and Beyond

Experts in the housing industry agree that the new mortgage rules set to take effect on December 15, 2024, will provide some positive momentum for the Canadian housing market as it continues its recovery. However, their impact is expected to be temporary, with several factors potentially limiting their effectiveness.

The federal government has introduced two key changes aimed at easing the path for homebuyers:

1. Extended Mortgage Amortizations: First-time homebuyers and buyers of new builds will have access to 30-year amortizations, which should lower their monthly payments and make homeownership more affordable.
   
   

2. Higher Insured Mortgage Cap: The insured mortgage limit will rise to $1.5 million, making it easier for buyers in high-cost markets such as Toronto and Vancouver to qualify for mortgages with a down payment of less than 20%.
   
   

According to a recent report by TD Economist Rishi Sondhi, these changes are expected to stimulate some activity in the housing market. However, he cautions that they alone won't trigger a housing boom. Instead, the measures are likely to serve as a secondary boost to a market that’s already gaining momentum due to lower borrowing costs and a gradually improving economy.

“While these changes offer some relief, they may also contribute to higher home prices, which could offset their initial benefits,” Sondhi says. This sets up a catch-22: while the changes are likely to help more first-time buyers enter the market, the added demand could push home prices up, reducing the affordability advantage they were meant to provide.

A Closer Look at the Key Changes

1. Extended Mortgage Amortizations

The new rule allowing for 30-year amortizations for first-time buyers could increase their purchasing power by as much as 9%, assuming they are purchasing a typical home with the minimum down payment. While this is a significant benefit, it's important to note that the change only applies to insured mortgages, which make up a smaller portion of the overall market. In fact, only 44% of home sales are attributed to first-time buyers, and just 20% of mortgages issued this year have been insured. While TD Economics predicts that the share of insured mortgages could rise due to these changes, their overall impact will likely remain modest.

2. Insured Mortgage Cap Increase

The increase in the insured mortgage cap to $1.5 million could have a bigger impact on buyers in high-cost cities. For example, in Toronto, where the median price of a detached home was $1.2 million in August, the new rules would allow buyers to make a down payment of $95,000, rather than the $240,000 required under the previous cap. With around 20% of homes in Canada priced between $1 million and $1.5 million, this policy could boost activity in this segment of the market.

What Does This Mean for the Housing Market?

In the short term, the new rules are expected to generate increased home sales and slightly higher prices in early 2025. However, several factors will dampen their long-term effectiveness. First, the extended amortizations only benefit first-time buyers, a relatively small part of the market. Second, while the increase in the insured mortgage cap will help in expensive markets, many buyers may still struggle to afford homes in the targeted price range.

Karen Yolevski, COO at Royal LePage Real Estate Services, agrees that while any measures that help first-time buyers are welcome, they don't address the core challenges of affordability and supply. "These changes may provide temporary relief, but they don't fix the underlying issues. There’s no quick fix for the Canadian housing market," she says.

Yolevski emphasizes the need for comprehensive policies that can drive long-term change. "What we really need is a focus on increasing housing supply," she adds. Without significant progress in this area, any short-term improvements will be short-lived.

What About the Impact on Buying Power?

Mortgage broker Ron Butler, founder of Butler Mortgage Inc. in Toronto, suggests that the new rules could increase buying power by as much as 12% for some Canadians—8% due to the extended amortization period and 4% from the increased insured mortgage cap.

“This is positive news, especially when combined with the current trend of falling mortgage rates,” Butler says. He also notes two additional rule changes set to take effect in late 2024 and early 2025, which could further influence the market:

• Nov. 21, 2024: Homeowners renewing their mortgages will no longer have to qualify under the 2% stress test if they are simply switching lenders. This makes it easier for homeowners to shop around for better rates and products.
  
  

• Jan. 15, 2025: Homeowners will be able to access up to 90% of their home’s value through default-insured refinancing, which can be used to fund secondary suites. This is designed to increase the rental supply in high-demand areas while helping homeowners manage rising mortgage costs.
  
  

Will More Changes Be Coming?

Given the government's desire to appear proactive in addressing housing issues, it’s likely that more rule changes could follow. However, while these changes may provide some short-term relief, the focus needs to remain on addressing medium- and long-term supply issues. As Butler points out, policy shifts don’t come with a cost to the government’s budget, making them an attractive option for immediate action.

Still, without a comprehensive plan to boost housing supply, the positive effects of these changes could be short-lived. "What’s truly needed is a concerted effort to increase the supply of homes," says Yolevski. "Until we have a plan to meet demand with enough housing inventory, it will be hard to sustain any momentum."

Conclusion

While the new mortgage rules in Canada provide some promising short-term benefits for homebuyers, especially those in high-cost markets and first-time buyers, they won't solve the underlying challenges facing the housing market. Affordability remains a major issue, and the continued focus must be on increasing housing supply to ensure the success of any rule changes in the long run. Only by addressing both demand and supply can Canada hope to create a sustainable and balanced housing market.