Canada's Insured $1.5M First-Time Home Buyer Loans

Canada appears to be doubling down on its position that more demand will create affordability. Earlier this week, the Government of Canada (GoC) announced its “boldest mortgage reforms ever,” including its most ridiculous mortgage reform ever—first-time buyers using state-backed, high leverage loans to purchase $1.5 million homes. Confused? You’re probably thinking: First-time buyers usually don’t dominate the high-end luxury market, nor do they typically have the 1% income required to carry a high leverage loan of that size. 

You’re smarter than most, so congrats. You’re also not alone, because the Department of Finance (DoF) wasn’t entirely sure either. The changes come at a time where banks are seeing mortgage arrears surge, and begs the question, who exactly does Canada consider a first-time home buyer? 

Canadian first-time home buyers will soon be able to access much larger high-ratio loans. Starting December 15, 2024, the maximum purchase limit for a first-time buyer will be a whopping $1.5 million—nearly double the national average. For those unaware, a high-ratio loan is one where the borrower has a minimal down payment of less than 20%, and the lender is required to obtain default insurance. 

The max will be raised 50% from the current limit. The GoC justified the move by stating the maximum hasn’t been increased since 2012, though it’s unclear if they understood why the limit was originally set. Back then insured mortgages weren’t exclusive to first-time buyers, but included refinances as well. The intention was to set a limit and deleverage, which is very different from the maximum that first-time buyers need.  

The narrative here is that first-time home buyers are facing limits on their purchasing power with just a $1 million budget. That sounds plausible at first, unless you’re in the industry or own a home. Let’s go over the numbers. 

Canadian real estate has climbed dramatically over the past few years, but not to the extent the government presented. A benchmark, or typical, home across the country was $717,000 this past August, or $521,000 for a condo apartment. They have a lot of options in their budget.  

Perhaps it’s for households in more expensive cities? The price of a benchmark condo in Toronto ($667,000) and Vancouver ($768,000) are both considerably below the current threshold. If you’re pondering how much one has to make to get to the new threshold, you might be onto something. 

To hit the new limit, a first-time buyer would have to be amongst the wealthiest households in Canada. A minimum annual income of $250k would be needed just to carry the maximum loan. That’s the highest tax bracket in Canada. They also need to make more to cover the taxes, maintenance, and insurance—putting them in the top 1% of Canadians. If the 1% can’t afford their first-home without a state-backed high ratio mortgage, the other 99% of Canada needs to realize it’s time to find a new country. Obviously that’s not the case.

Let’s take a peak at actual first-time buyer finances. Greater Vancouver is home to the first-time buyers with the deepest pockets, so let’s start there. According to the Canadian Housing Statistics Program (CHSP), immigrants make slightly more expensive purchases as first-time home buyers at a median price of $680,000 on an income of $136k. That’s roughly half the price and income of the new limit. 

Parental help is common and those budgets are bigger, but not as big as the GoC thinks. In Greater Vancouver, a median first-time home buyer with 3 or more people on the mortgage, spent $778,000 and had a combined income of $172,700. Those incomes are considerably higher than a typical household, but almost 6-figures short of approaching the new threshold. Clearly this isn’t about generating more first time home buyers, and if it is—it’s a handful of the wealthiest households in the country that probably don’t need state assistance. What gives? 

Let’s circle back and clarify something important about foreclosures and mortgage insurance. Foreclosures are rare when the market rises, as has been the case for 30 years. It’s not that there’s a lack of households struggling with payments during this period, but they’re able to sell, and maybe even turn a profit, before a default. Rising defaults occur when borrowers can’t find a buyer, either they can’t afford to lower the price or buyers can’t afford to pay more. In other words, delinquencies are indicative of liquidity not credit quality.  

Mortgage insurance protects the lenders from losses. In the rare event a foreclosure occurs and the lender recovers all funds, the surplus is returned to the borrower and insurance doesn’t kick in. When the lender fails to recover the full amount they’re owed, the insurance tops up the amount recovered to correct the losses. The insurer can then pursue the borrower for the payout. In short, mortgage insurance protects the lender, not the borrower.   

“On background – yesterday’s announcement means more people can qualify for a mortgage needing a downpayment of less than 20 per cent,” explained Cuplinskas, delivering a non-contextual response to the direct question of portfolio application. 

Adding, “further details on implementation will be announced in the near term.” 

For those not fluent in Canadian Government, it means their bosses didn’t tell them anything. That’s unusual for a policy that would have typically required significant consultation and an impact report. Sources at OSFI and CMHC, who declined to be named, also claim they were blindsided by the announcement. Members of Parliament contacted have also been trying to determine who knew this policy was coming, but so far haven’t found anyone aware prior to the announcement.   

It’s unclear exactly why this policy was rolled out. It certainly isn’t because the top 1% of households are struggling to purchase their first-home, and it’ll revive the market. The surprise announcement in the current environment makes it most likely a lender mitigation tool for a demographic of buyers we don’t think of as first-time home buyers. Ones who suddenly have very high incomes, where a lender is concerned about the legitimacy of the funds.  

So many questions. Unfortunately the government’s only answer was more people will be able to buy homes with less than 20% down.