(Bloomberg) -- Prime Minister Justin Trudeau’s government will make 30-year mortgages available to all first-time buyers and to buyers of newly built homes as the embattled leader tries to win back the approval of younger Canadians.
The government will also begin allowing mortgage default insurance on homes worth up to C$1.5 million ($1.1 million), an increase from the current cap of C$1 million. That means buyers can bid on more expensive homes even if they have less than a 20% down payment — as long as they purchase insurance.
“We are now making the boldest mortgage reforms in decades to unlock homeownership for younger Canadians,” Finance Minister Chrystia Freeland said in a news release. The moves will take effect Dec. 15.
Canada cracked down on lengthy mortgage amortizations during the 2008 global financial crisis. Until this year, buyers who required government-backed default insurance on their mortgages were limited to 25-year amortizations.
Trudeau and Freeland took a step toward loosening that rule in April, allowing 30-year amortizations on insured mortgages only for first-time buyers purchasing newly built homes.
Monday’s announcement will significantly expand the pool of buyers who can access 30-year loans, which substantially lowers monthly payments. Insured first-time buyers represent roughly 20% of the market in Canada, while new builds make up about 4%, Freeland said.
Freeland noted that the insured-mortgage cap hadn’t been adjusted since 2012. Housing prices in Canada have doubled since then, with the average price in August reaching C$1.1 million in Toronto and C$1.3 million in Vancouver.
The announcement raised questions about whether the moves would juice the housing market and saddle younger Canadians with more debt. The country’s households are the most indebted in the Group of Seven and over-investment in real estate has been blamed as a source of a persistent productivity crisis.
The government’s actions may mean interest rates won’t need to fall as much to spark a housing market rebound, said Benjamin Reitzes, rates and macro strategist at Bank of Montreal.
“My bigger concern is that the market has calmed and behaved as well as policymakers could have hoped, and now we’re adding fuel,” he said by email. “Canadian households have been responsibly de-leveraging driven by higher rates, and these changes will only incent increased debt burdens.”
In a June research paper, Desjardins economist Marc Desormeaux analyzed the potential impact of extending mortgage amortizations in Canada. He concluded that while the policy change would immediately help those in a position to buy, the medium-term outcome would be an increase in home prices.
“Affordability would eventually become even worse than in the base case as initial gains are overcome by a more dramatic rise in home values,” he wrote.
At a news conference, Freeland pushed back on concerns that the policies would inflate housing prices. She said extending the amortization period for new builds would help create more supply, and her government has also put forward other measures to boost homebuilding, including billions for municipalities to allow denser zoning and cut red tape.
“What this is all about is putting the dream of home ownership in reach for younger Canadians, giving first-time home buyers a leg up in the housing market,” she said.
At an interest rate of 5%, amortizing a mortgage over 30 years instead of 25 would reduce a homebuyer's monthly payment by 8%, but increase total interest paid by 24%, according to Bloomberg calculations.
Canadian home sales data for August suggested a pickup in market activity after the central bank delivered back-to-back rate cuts in June and July.
New listings were up 1.1% in August from a month earlier, and the total number of properties for sale at the end of August was 177,450, an increase of nearly 19% from a year earlier.
Both Trudeau and Freeland have made housing a central plank of their economic messaging this year, pledging numerous programs to boost construction and provide easier access to financing. But so far those moves have not improved Trudeau’s position in public opinion polling.
An election is scheduled for October 2025, but it could come any time in the next year, especially after Trudeau’s ally in Parliament pulled out of a power-sharing deal earlier this month.
If an election were held today, Pierre Poilievre’s Conservative Party would very likely win a majority government in parliament, given his dominant lead in the polls.
Voters in a Montreal district are casting ballots Monday to fill a vacant seat long held by Trudeau’s Liberals. The special election is viewed by many as a referendum on his leadership.
--With assistance from Erik Hertzberg and Jay Zhao-Murray.
(Adds estimate of impact to mortgage payments and interest in paragraph 15. Earlier updates added reaction from economists, quotes from Freeland news conference.)
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