A recent study conducted by BMO suggests that 49% of Canadians know little to nothing about the new mortgage rules that took effect on July 9th, 2012.
To recap, these changes, for mortgages with government-backed default insurance,
- Reduce amortizations to 25 years (correctly identified by only 45% of Canadians) ,
- Limit refinances to 80% of a home’s value,
- Fix service ratios to 39% for household costs (mortgage, taxes & heat), and 44% for all debts, including household costs, car loans, credit card payments and other debts, and
- Limit insurance to homes with purchase prices of less than $1,000,000.
YES, You Can Still Buy with 5% Down.
In the last round of changes, many Buyers mistakenly thought they could no longer buy with 5% down. Once again, the 5% minimum downpayment to buy is still allowed, in spite of the new rules changes.
How do the Rules Changes Effect Buying with 5%?
Before the new changes, one could buy with 5% down and amortize their payments over 30 years.
With the new changes, one can still buy with 5% down but the maximum amortization must be 25 years.
This Can Effect Your Payments and the Overall Interest You Will Pay
As an example, you purchase a house for $200,000 with a downpayment of 5% ($10,000). This gives you a mortgage of $190,000. Standard default Insurance of 2.75% ($5,225) is usually added to the mortgage.
The total amount that your payment is based on is, therefore, $195,225.
Let's say that you qualify for a 3.19% interest rate and the payments are monthly.
An amortization of 25 years (the current maximum) results in a payment of $943.03.
An amortization of 30 years (the previous maximum) results in a payment of $840.98.
The lower amortization of 25 years increases the payment by approximately $102.05 per month.
Long term, however, you pay off your mortgage sooner and you save $19,841.54 in additional interest payments.