Starting on August 1st, Canadians will have the option to obtain 30-year mortgages.

Canadians will soon have the option to extend their mortgages to 30 years, starting in the upcoming month. The federal government believes that this move will reduce monthly expenses and make homeownership more accessible to first-time buyers.

Expressing the goal of providing hope for young Canadians aspiring to own a home, Freeland stated, “One of the biggest obstacles faced by younger Canadians when it comes to homeownership is qualifying for a mortgage and managing the monthly payments.” In a news release on July 29, she added, “Therefore, starting August 1, first-time buyers of new properties will be able to lessen their monthly payments by opting for up to 30-year mortgages.”

Currently, under existing regulations, if the down payment is less than 20% of the property value, the longest permissible amortization period is 25 years.

Although the monthly payments may be lower with a 30-year mortgage, the Royal Bank of Canada (RBC) highlights that the interest payments would be higher.

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“A longer amortization period requires lower monthly payments. However, you will pay more interest over the life of the mortgage and it may take longer to build the equity in your home,” the RBC website says.

RBC provided an example with a $150,000 principal mortgage. While the monthly payment for a 25-year plan would amount to $780.04, it would reduce to $713.28 for a 30-year schedule. However, the interest costs for the full term would be $20,000 more with the 30-year option.

To be eligible for a 30-year mortgage, buyers are required to meet certain criteria. Firstly, the purchase must be for a newly constructed property, not one currently available on the market.

Moreover, at least one of the borrowers must be a first-time homebuyer, meaning they have not previously owned a home or have not done so within the last four years, or have recently experienced a relationship breakdown such as divorce or separation.

Some critics, including University of Toronto assistant professor of economics Rob Gillezeau, have expressed concerns about the government’s strategy, fearing it could drive up home prices and negatively impact affordability.

In the fourth quarter of 2023, households in Canada with median income would need to allocate 63.5% of it to afford a home at market value, as per RBC assistant chief economist Robert Hogue in an April 2 report.

Hogue projected that it would take some time for ownership costs to decrease, estimating a return to mid-2022 price levels by 2025. “This would offer minimal relief for most potential buyers, and it will likely take several years to restore affordability in many of Canada’s major markets,” he remarked. “Given this context, we anticipate a slow initial recovery in the housing market, followed by a more rapid upturn as interest rate cuts accumulate.”