How will the 2024 Federal Budget impact mortgage borrowers?

The 2024 Federal Budget, released this week by the federal Liberal government, is chock full of housing measures, with the aim of easing affordability for first-time home buyers and boosting new supply. Many of the items – such as changes to Canada’s mortgage charter and stronger rights for renters – were announced in recent weeks in the lead up to the Budget’s official drop – but there are still a few surprising tidbits with implications for Canadian home buyers. 

Overall, the Budget presents $52.9 billion in new spending – with $7.4 billion specifically earmarked for housing via the More Affordable Homes plan – which will result in a $39.8-billion deficit this fiscal year.

Here’s a rundown of how these new measures may impact the mortgage and housing market.

An increase to the capital gains inclusion rate

Perhaps the budget’s biggest headline-maker is amending the Income Tax Act to increase the capital gains inclusion rate from the current half to two-thirds (resulting in a tax rate of 66.7%), to go into effect on June 25.

While this affects all gains earned by corporations and trusts, the new tax rate will only apply to capital gains above $250,000 for individuals. 

This will have the most impact on anyone who owns a non-principal residence, such as an investment property, or vacation home. Under the new rule, any gains in value the property has accrued since it was first purchased that exceed $250,000, will be taxed at the new rate. The sale of principal residences will remain fully exempt from capital gains tax. 

“By increasing the capital gains inclusion rate, we will tackle one of the most regressive elements in Canada's tax system. Our government is proud to be reducing this inequity. Taxing capital gains is not an inherently partisan idea. It is an idea that everyone who cares about fairness can support,” reads the Budget.

The change is expected to generate $21.9 billion in revenue over five years, with the proceeds to potentially go to new supply building objectives. The government estimates 0.13% of individual Canadians with an average income of $1.42 million will be impacted, while the higher inclusion rate will hit 12% of companies.

The following groups, however, will continue to be exempt from capital gains tax:

• Capital gains from selling your principal residence.
  
• Income, including capital gains, earned in a tax-sheltered savings account, such as an RRSP, RRIF, TFSA, FHSA, or RESP.
  
• Pension income or the capital gains earned by the registered pension plans you or your spouse are a member of including your workplace pension plan, and the CPP or QPP.
  
• Up to $250,000 every year in capital gains from selling a cottage, investment property, or other taxable investments, such as stocks, beyond the generous limits of tax-sheltered savings accounts.

It remains to be seen whether this new tax rate will impact the psyche of real estate investors, and potentially lead to a flurry of sales to crystallize gains under the existing tax system before the new inclusion rate comes into effect. 

Federal Budget updates that impact mortgages

Re-introducing 30-year amortizations for some insured home buyers

As we reported last week, the federal government has also announced it will bring back 30-year amortization periods for insured borrowers, on the provision that they are first-time home buyers, and are purchasing newly-constructed homes. The new policy will go into effect on August 1, 2024.

Insured borrowers – those who pay less than 20% down on their home purchase, and who must take out CMHC default insurance along with their mortgage – have been limited to 25-year payback periods since 2012.

Extending a mortgage’s amortization period helps reduce monthly payment size by spreading them over a longer time period – with the caveat that the borrower ultimately pays more in interest by the end. However, it’s been heralded as an effective solution by the mortgage industry to improve housing affordability. While this new measure is smaller in scope than industry watchers had hoped, it’s a positive start, says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender.

“We would have liked to see this applied for all first-time home buyers, regardless of the type of housing they have purchased,” he said. “The government has probably targeted newly built homes to increase demand, hoping that supply will follow, incentivizing more homes to be built.”

The Feds have also hinted they could be loosening additional rules for insured borrowers, starting consultations on whether they will allow insured borrowers to refinance their mortgages – and extend the current $1-million insured limit – in order to access equity to build a rental suite. However, timing around this initiative has yet to be announced.

Strengthening Canada’s Mortgage Charter

The feds also pre-announced updates to Canada’s Mortgage Charter, further strengthening expectations around how lenders treat distressed mortgage borrowers. The government says borrowers who have had their amortizations temporarily lengthened in order to provide payment relief should have those extensions made permanent, including for insured borrowers.

Extending amortizations on paper – sometimes by decades – was a common tactic used by lenders in 2022 and 2023, as rapidly rising interest rates crunched existing borrowers, especially those with variable rates and fixed payment schedules. 

Also read: How much interest would you pay on a 90-year mortgage?

However, given the Charter is merely a recommended guideline and not actual legislation, it remains to be seen how enforceable this will be in the case lenders don’t comply.

“The devil is in the details...” writes Jimmy Jean and Randall Bartlett, senior economists at Desjardins. “And ultimately, the Canadian Mortgage Charter consists more of a set of recommendations and doesn’t override current OSFI and CMHC requirements.”

An expansion to the Home Buyers’ Plan

First-time home buyers saving up their down payment now have more tax-free room to do so, as the government has expanded the contribution limit for the RRSP Home Buyers’ Plan (HBP) to $60,000, from the previous $35,000. This means two first-time buyers purchasing together could each max out their contribution room for a combined tax-free down payment of $120,000. The government has also extended the time period before repayment to five years, from two.

Also read: Programs for first-time home buyers in Canada in 2024

Consultations on how to provide Halal mortgages

The budget states the government is “exploring expanding access to Halal mortgages to better enable Muslim Canadians, and other diverse communities, to buy a home of their own.” This will address the Islamic faith belief that charging interest is a form of usury, and which condemns gains made through interest payments. However, no timeline has been provided on this initiative.

A new loan program for secondary suites

The government is looking to further incentivize the creation of secondary suites in existing housing stock. They’ve committed $409.6 million in spend over four years for the Canada Secondary Suite Loan Program; to be run through the Canada Mortgage and Housing Corporation (CMHC), this program will provide low-interest loans up to a maximum of $40,000 for this purpose. However, timing for the roll out is to be determined.

New budget measures for Canada’s housing market

This budget is the heaviest in years in terms of housing programming and spending, as the Liberals are keen to boost voter sentiment through new supply and affordability initiatives. Here’s a brief rundown of what’s to come: 

Stronger rights for renters

The government is rolling out a new Tenant Protection Fund and Canadian Renters’ Bill of Rights which will help shield tenants from steep rent hikes, renovictions, and bad landlords.

“The government intends to work, in collaboration with provincial and territorial partners, to crack down on renovictions, introduce a nationwide standard lease agreement, and require landlords to disclose historical rent prices of apartments,” reads the budget.

The feds are also advocating for rent payments to go toward credit building, which will help those with a good payment history build their credit scores, and better qualify for a mortgage in the future.

The Building More Homes Plan

The government has committed to building 3.87 million new homes by 2031, which will include an additional 2 million builds on top of the 1.87 million that had already been allotted. Spending earmarked by the federal government will directly support the creation of 1.2 million units, alongside efforts from provincial and municipal governments to create an additional 800,000, via a number of incentives.

This follows reports from both the CMHC and Parliamentary Budget Office, which has found that Canada needs 3.5 million homes by 2030 to restore housing affordability to 2003 - 2004 levels, with a minimum 181,000 units needed annually in order to hit 3.1 million units.

These efforts include “unlocking: existing government-owned lands for development, such as:

• Building Homes on Public Lands 
• Building Homes on Canada Post Properties
• Building Homes on National Defence Lands 
• Converting Underused Federal Offices Into Homes 
• Taxing Vacant Lands to Incentivize Construction

There is also a large focus on boosting the supply of affordable rental housing. The government is providing a $15-billion top up to the existing Apartment Construction Loan Program, which will create 30,000 more units nationwide. This brings the program’s total funding to $55 billion, with an output of over 131,000 new homes by 2032.

Additional initiatives include:

• Scaling-Up Modular Housing 
• Introducing an Accelerated Capital Cost Allowance for new purpose-built rental projects 
• Launching Canada Builds, which will cut development approval timelines to no longer than 12 to 18 months 
• Topping-Up the Housing Accelerator Fund with $400 million to build an additional 12,000 homes
• A New $6-billion Canada Housing Infrastructure Fund 
• Leveraging transit funding to build more homes, so that more homes get built faster and closer to transit services.
• A “Housing Design Catalogue”, which will provide blueprints that can be used across the country to speed up the construction of new homes, such as modular housing, row housing, fourplexes, sixplexes, and accessory dwelling units.
• Encouraging an increase in skilled trade workers by easing foreign credential recognition, and creating more apprenticeship opportunities. 
• Indigenous housing and community infrastructure 

The bottom line

Housing affordability is at an all-time low in Canada, and is only poised to be squeezed further, as supply issues continue to be exacerbated by aggressive immigration targets. These measures to aggressively build new housing, as well as ease mortgage qualification hurdles for some groups, could be a step in the right direction, assuming new spending doesn’t pump inflation, which could derail central bank plans for interest rate cuts in the coming months. It will be interesting to see whether these new housing plans are reflected in the Bank of Canada’s language in its upcoming June 5 announcement.

Also read:

• Federal government introduces 30-year amortizations for some insured borrowers
• Bank of Canada holds target interest rate at 5% in April 2024 announcement
• Rising home prices made it more challenging to buy a home in March
• Canadian CPI comes in at 2.9% in March
• Where to get the first home savings account