First time Home Buyers: You can still add another Key…Safely.
Feb 7, 2011 // by FryerMcMillan
Here at FryerMcmillan Group (FMG) we work closely with Mortgage Brokers but we are not in the Mortgage business. Of course, we understand that most people who are buying will need to qualify for a loan in order to complete the transaction. We are careful however, to view changes to these qualification criteria in a balanced way not just focusing on how it would affect us but more importantly, how it will affect you.
We have read several articles dealing with the upcoming changes to mortgage financing and truthfully, many of them take strong positions against the wisdom of these changes. Not surprisingly, most of them are written by people who perceive the changes to be detrimental to their business. We are sympathetic to that – many are our friends.
We have always told you that ‘it’s more than just the sale’ – that also means that it’s about YOU not us. We are neither advocating for the changes or arguing against them. We are going to provide you with the facts and help you to understand the pros and the cons for you and your family. More than that, we will provide you with practical ideas about how best to prepare and negate any adverse effects these changes may have for you.
What’s Changing? Ok, so there are basically 3 changes and they cover 3 categories:
-How long you can take to pay what you borrow
-How much you can borrow against your existing property relative to its value.
-Government Insurance on your debt. We’ll look at each one.
You can check out all the legalese here
How long can you take to Pay off what you owe?
The 30 year mortgage is almost folklore. We have heard it mentioned so many times on Sitcoms and in movies. In Canada over the last several years, you could take as long as 40 years to pay off that loan. The government has decided to change that and effective March 18, 2011 you will no longer be able to get an amortization period longer than 30 years.
This is a big change for both the lending industry and consumers.
How it Affects YOU?:
-You MAY have to borrow less now that you have a shorter period over which to repay.
- You WILL pay less in Interest payments since you will have a shorter period over which to repay.
- You WILL have more stability in your purchase because your loan will more accurately reflect your true affordability.
How much can you borrow against your Property?
On March 18th 2011 when these new rules become effective, you will no longer be able to refinance more than 85% of the market value of your property. Currently you can refinance up to 90%. The primary purpose of this change is to tamper down speculative energy in the Real Estate market. As has been evident in the U.S. Market, excessive speculation can distort real market behavior and lead to problems.
How it affects YOU?
- Not very much unless …you are a Real Estate Investor in which case it may mean coming up with more money out of pocket.
-Once again, it provides more financial stability for homeowners because if you borrow too much relative to the current value of the property, you may have problems if either property values fall and/or interest rates rise.
No Government Insurance?
This is another change that probably won’t affect many people. The Government will no longer insure non-amortized debt such as Lines of Credit secured by the equity in your home. The purpose of this change is likely to dissuade homeowners from using their homes as a Piggy-Bank. This was a common paractice in the United States over the last several years. By all accounts it is a risky proposition because you are borrowing money against unrealized value.
How it affects YOU?
Makes it more difficult and expensive to borrow money against the equity in your home. This was already an expensive proposition before this rule.
What can you do?
First, ignore the hype and focus on the facts. If you think you may be adversely affected by these changes, first ask yourself some tough but necessary questions.
Am I trying to buy too much house based on my Income? If extending the amortization period was the only way to qualify for a certain amount, now might be a good time to reconsider that amount. A Mortgage Broker can tell you how much you can buy but YOU should decide how much you can afford!
Have I objectively and dispassionately examined what the future will look like?
- My relative job security. Illnesses.
- Proper accounting for upcoming obligations such as Kids starting School.
- Other major financial obligations that may be on the horizon.
-Contingencies – This is crucial and covers things you simply cannot think of today.
-What is my primary motivation for purchasing a home now?
-What is the maximum adverse move in Interest Rates I could absorb before having to abandon ship?
-Do I have a trusted Realtor to guide me through the process?
Whether you are a first time buyer or an existing homeowner, these changes will likely affect you now or in the future. Don’t concern yourself too much with whether they are good or bad policies – it is now the law. Focus on what they are generally designed to do and ensure that your financial house is in good order. It won’t just get you into the right house, it will make your time in the house more peaceful and enjoyable.