Finance Minister Jim Flaherty announced three new changes to financing rules. Effective March 18, 2011, it will become harder to buy a new home or consolidate debt into your mortgage. What are the changes?
- The maximum amortization period has been reduced from 35 years to 30 years for mortgages that are insured by CMHC where the homeowner has less than 20% equity on the subject property. This change takes effect on March 18, 2011.
- An 85% limit on insured refinances, reduced from 90%. Takes change effect March 18, 2011
- Elimination of government insurance on secured lines of credit commonly referred to as HELOC or Home Equity Line Of Credit. This change takes effect on April 18, 2011.
So the question is, what does this mean and, most importantly, how does it impact you and your decisions?
A shorter amortization period equates to a higher payment amount) while a longer amortization period results in a lower payment amount. The amortization is typically used as a tool to control cash-flow . The impact to you is that a longer amortization results in more interest being paid in the long run but more cash in your pockets on a monthly basis. It’s important to remember that the amortization can always be renegotiated at the start of a new mortgage term.
This change will my typically affect people buying their first home and not having the 20% minimum down payment to avoid paying the required insurance premium. Spreading the payments over 30 or 35 years may make sense if money is tight as this will keeps more money in your pockets.
Keep in mind that while extending the amortization period will keep more money in your pockets (let’s say $100 / month) the cost of that on your mortgage is worth more than that. As an example, if you were to borrow $300,000 today at a rate of 3.79% (5-year fixed rate term), the monthly payment would be $1,284 based on a 35-year amortization. If the amortization period is reduced to 30 years, the mortgage payment would be $1,389, a difference of about $100 a month. Keep in mind that the long-term savings would be greater than $1,200 a year as a shorter amortization would have less interest. But again, we’re talking long term savings. The allocation to interest is much greater at the beginning of a new mortgage and keeping the cost of interest down means making aggressive prepayments at the beginning of the term as opposed to later on.
How this impacts you will depend on your individual situation. However, with the cost of homes increasing at a steady pace year after year and the average house price over $500,000 it may mean the difference between qualifying or not. Of course there are always options (condo’s, smaller homes, other areas) home ownership is always a way to secure yourself against inflation and, everyone needs a place to live.
If you're in the market now may be a good time to make a move but as always be sure to consult appropriate professionals.
Feel free to contact me and I can provide you with a number of excellent mortgage professionals to discuss your options and I am more than willing to share my expertise on buying and selling. Consultations are always FREE! :D