Banks and developers urge Ottawa to help first-time buyers, relax mortgage rules

A coalition of Canada's largest banks and major homebuilders is calling on the federal government to introduce down payment assistance for first-time buyers and relax mortgage qualification rules. The group released a report Tuesday with 29 recommendations aimed at boosting housing affordability and construction. The report, endorsed by banks including Royal Bank of Canada and Bank of Montreal and developers like Mattamy Homes, seeks to inform federal policies targeting nearly 500,000 housing starts annually. It focuses on changes to long-term investment, credit risk, immigration policy and housing data.

One key proposal is to create down payment assistance programs and reduce down payment requirements for first-time purchasers of new homes. The report suggests allowing buyers to deduct mortgage interest from taxable income and ensuring they are not fully exempt from capital-gains tax upon sale. "We want to increase housing affordability across Canada," said James Burrow, BMO's head of enterprise sustainable finance solutions. The report argues that without easier financing for new homes, homebuilding "will continue to be constrained."

The initiative also recommends reforming the mortgage stress test, which requires borrowers to prove they can afford payments at a rate two percentage points above their contract rate. The report calls the test a valuable tool but says it is too blunt and excludes creditworthy borrowers. It proposes a more flexible, sliding scale based on mortgage term and buyer type, with easier rates for first-time buyers of new homes. This change would help more borrowers qualify, increasing demand for new construction.

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Another major recommendation is for the government to provide low-cost financing to developers of condos, townhomes and single-family homes, not just rental buildings. Such financing would reduce lender risk, allowing projects to proceed without meeting high pre-sale thresholds. Developers in markets like Toronto often must sell 70 percent of units to secure construction loans. Wesgroup chief executive Beau Jarvis said this could lower pre-sale requirements but developers would need to accept building with unsold units. "It means perhaps you're returning to more of a speculative development paradigm where you are speculating that purchasers are going to be there to buy the homes that you built when they're complete," he said.

Burrow said banks can catalyze capital but some risks are not prudent for them. "It means the federal government plays a role in what is sometimes the riskiest stage of home development, which is the actual construction phase itself," he said. The report was compiled by the Building Industry and Land Development Association and The Missing Middle Initiative. Backers include CIBC, TD Bank, Scotiabank and developers such as Minto Group, Menkes Developments and Brookfield Residential.

With files from The Globe and Mail