As most of you well know the new mortgage rules are now in effect - official kick off being March 18th. Many have stated these new terms but what do they really mean. Concern over rising consumer debt had prompted Ottawa to make changes to Canada's mortgage rules - announced back in January of this year. Key here is - rising consumer debt - in a sluggish economy. Nightmares of 2008 south of the Border are still very fresh in everyones mind. This also indicates that no matter how it is portrayed in the public eye - the Federal Government's economic outlook is still a fragile one. We are a small economy in comparison to others but have held our own on most fronts for the past 3 years.
How long can this last ? Anyone's guess - but take a hard look at the rest of the world - its only a matter of time before David bends a bit as Goliath continues it's economic path.
So, the consumer debt load is on Ottawa's radar. Apparently at levels never before registered. Funny how plastic is not only bad for the environment but also the wallet. To reduce the risk of a repeat south of the Border, a major change sure to affect first time home buyers is the amortization period.
Mortgage Amortization Period: What It Is and Why It Matters
Mortage amorization period is the number of years it takes to repay the mortgage in full. The longer the length of time (35 years) the lower the monthly payments. This allowed those who "just" made the grade to qualify for a mortgage. Of course since the lender is charging interest on the mortgage - the longer the period - the more interest you will pay.
The following is an example of the differance in payment schedules and total term end costs (for your home) that amortiazation periods can make.
You have a $200,000 mortgage at a 6% interest rate. With a 25 year amort period - your monthly payment would be $1,279.61. That means that over the life of your 25 year mortgage, your total payments will be $383,883. Almost double the cost of the home.
However, it you shorten the amort period to 20 years, the monthly payment increases to $1,424.38. Bad news ? Not necessarily. Because you are now only paying for 20 years, you have reduced your total payments from $383,883 (25 years) to only $341,851.00 - saving almost $42,000.00.
Go a step further, to 15 years, your monthly payment would be $1,679.77, - total payments over 15 years would be $302,359.00, saving over $81,000.
This all comes back to the amount you can pay per month. Back in the day, the term "house poor" was just that - paying as much as you can to shorten the amortization period. Didn't leave much else for life's little pleasures - hence more families were beginning to opt for the longer repayment period and leaving more disposable cash. These are even more significant now with lifestyle changes and attitudes. But for those who have the ability and confidence in continued employment - a quick run of the numbers will pay dividends in the long term.
Using Your Home As A Piggy Bank
Refinancing your home to pay down high-interest debt is still a smart stratergy to save interest in the long term. However, there are common sense limits to using your home as a piggy bank, and now the new rules dictate you must protect at least 15% of your equity, up from 10%. Where this could cause a problem is with those who are overextended on high-interest debt. They may no longer be able to payout all of these debts and get a sounder financial footing with a lower payment and less interest costs. This change also means homeowners will have less access to their equity for investing, renovations, or to fund educational needs. This is the most significant change - reduced access to home equity.
I welcome all feedback and questions about what is really happening with real estate in Vancouver. Contact me anytime - it would be my pleasure to chat and share with you - thoughts on your future plans.