Mortgage Changes Clarified

New mortgage rules will take effect next Monday. I've been reading a lot of the news articles about the changes and I think it's important to clarify a few points.

25 Year Amortization Period

For government-backed insured mortgages, a 5% down payment is still the minimum requirement. If you put a 20% down payment on a home, then you will not need mortgage insurance and will not be limited to the 25 year amortization period. The change to the maximum amortization period only affects new government-backed insured mortgages.

Here's a chart comparing your monthly payments if you had a 25 year mortgage versus a 30 year mortgage. This is assuming that your mortgage is based on the current rate of 3.3%.

Cost of home $200,000 $360,000 $550,000
Minimum down payment (5%) $10,000 $18,000 $27,500
Mortgage amount $190,000 $342,000 $522,500
Monthly Mortgage Payment (based on 3.3% interest)
25 Years $928.67 $1671.60 $2553.83
30 years $829.77 $1493.58 $2281.86

As you can see, with a 25 year amortization period, you'll have higher monthly payments. However, you will save significantly in interest payments in the lifetime of your mortgage. Based on the same information as the scenario above, here is what you could save in the long run.

Mortgage amount $190,000 $342,000 $522.500
Total payments with 25 year $278,600

$501.480

$766.151
Totaly payments with 30 year $298,715 $537,689 $821.468
Interest Savings $20,115 $36,208 $55,317

80% Borrowing During Refinancing

Reports indicate that household debt had reached an all-time high in Canada this year and most of that was mortgage debt. This change is designed to hopefully encourage homeowners to keep equity in their homes instead of using their home equity "as an ATM machine."

The amount you would be able to borrow when refinancing is calculated by taking the appraised value of your home and taking 80% of that value then subtracting the amount of your current mortgage (if applicable). Here's an example of how this works.

You'd like to borrow money to renovate your home. Your home is worth $360,000 (based on an appraisal done by the bank). You still owe $150,000 on your current mortgage.

In this calculation, you would be able to borrow up to $138,000.

These changes only bring us back to conditions we had 8 years ago. In 2004, the maximum amortization period was 25 years and the maximum borrowing during refinancing was 75% loan-to-value. It was only between 2006 and 2008 where we saw relaxed mortgage rules, with 100% refinancing and 40 year mortgages.

5 Comments

  1. Groperty 07/06/2012 at 3:22 PM

    Very informative, well written. Never opt for the bare minimum with regards to down payments (I am aware that it was used to illustrate the changes). A larger down payment

  2. Buy to Let Insurance 07/19/2012 at 12:01 AM

    Well described about the mortgage changes. All the doubts were clarified after reading this blog. Keep informing like this.

  3. Samina Khan 08/29/2012 at 3:56 PM

    Yeah! best to keep the downpayment higher and Amortization period lower, it really pays off.

  4. Ascot BTL Mortgages 10/11/2012 at 3:45 PM

    This is a great illustration to explain the importance of putting down a high down payment. Very helpful and well thought out demonstration / examples.

  5. MonctonMove 10/12/2012 at 10:33 AM

    Very informative. 80% refinancing rate appears to be a little high. I guess everything is build upon the notion that a 20% hit in home prices is not a very high probability event.

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