Buying your first home in Kitchener Waterloo can be confusing enough. Recently, the federal government made 3 changes to mortgage policy through the Canada Mortgage and Housing Corporation(CMHC) that created further confusion. While I read a great deal about the changes, the analysis of the impact of the changes was sorely lacking. So if I'm a first time buyer in Kitchener Waterloo, how do these changes affect me?
Likely the most significant change from a first time buyer perspective is the shortening of the maximum amortization on CMHC insured mortgages from 35 years to 30 years. First, what is an amortization? For our purposes, an amortization is the gradual elimination of the mortgage liability by making regular payments over a specified time period. These regular payments consist of both principal and interest. In other words, how long 'til I burn my mortgage? Now you're likely thinking why would anyone want to take 35 years to pay off their mortgage when they could do it in 30 years?
The answer for most is cheaper payments. Let's run the numbers on an example. Freehold townhomes are popular with first time buyers in Kitchener Waterloo. We'll use a 3 bedroom freehold townhome with a market value of $230,000. The buyer has saved the 5% downpayment and has 1.5% set aside for closing costs with no other debts. Note the CMHC insurance premium is 2.75% with 5% downpayments and surcharges of .2 and .4 per cent apply for 30 and 35 year amortizations respectively. For simplicity, we'll assume the buyer makes monthly payments at 4% for 5 years.
Purchase Price: 230,000 - 5% downpayment of $11,500 = $218,500.
30 year amortization - CMHC insurance $218,500 x 2.95% = $6445.75
35 year amortization - CMHC insurance $218,500 x 3.15% = $6882.75
CMHC allows the buyer to add the insurance premium on top of the mortgage amount so we have first mortgages of $224,945.75 and $225,382.75 for the 30 and 35 year amortizations respectively. Monthly payments are $1069.66 with 30 years and $993.49 for 35 years. The difference in monthly payments is $76.17 and, over 5 years, that amounts to $4570.20. However, the mortgage balances at the end of 5 years are $203,349.36 for 30 years and $208,927.86 for 35 years, a difference of $5578.50. By paying for your mortgage over 35 years rather than 30, you lose $1008.30.
Now let's look at how this change affects the buyers ability to qualify for that mortgage. Let's say the first-time buyer has a total income of $50,000. We'll use property taxes of $200/month and heating costs of $35/month. With a 30 year amortization, the buyer qualifies for a mortgage of $230,975.84.
How does this change for 35 years? Using the same figures, the first time buyer now qualifies for $249,167.27, roughly $18,000 or nearly 8% more. In practical terms, this could be the difference between a single garage and a double or a finished basement versus an unfinished one.
So in the final analysis, the shortened amortization requirement means our first time buyer qualifies for a lower mortgage amount, makes a higher monthly payment and pays less interest thus retiring the debt sooner.
If you're a first-time buyer in Kitchener Waterloo, I'll be happy to consult with you. Together, we'll analyze your situation and develop a plan to make the mortgage math easy to understand. Feel free to call or email 519-505-4488 firstname.lastname@example.org.
Century 21 Home Realty Inc. Brokerage
"Delivering results since 1989"