So as many Canadians are aware Ottawa has recently changed a few mortgage rules. It seems though, with the publicity that it has received that many consumers are still confused about what has been changed, what this really means and how its going to effect them and the market place. The first thing I would like to do is clarify what has really been changed and what these means for us and the GTA real estate market.
1. HOME EQUITY LOANS: Previously lenders were permitted to lend up to a maximum of 85% of the property value. NOW lenders are permitted to lend up to a maximum of 80% of home value.
How does this effect you: Professionally and personally I believe this is a positive thing. Your home is your most valuable asset and your most important asset. I think its important to keep equity in your home instead of taking it out and spending it on things we really don't need and racking up more debt. Lets pay down our mortgages and properly prepare for retirement.
For a little more information on Canadian retirement statistics and retiring with debt check out this site: http://www.statcan.gc.ca/pub/75-001-x/2011002/article/11428-eng.htm. Prepare yourself properly.
2. Mortgage Amortization Periods: Previously we could obtain a mortgage and the maximum amortization period of 30 years. NOW we can amortize our mortgage over a maximum period of 25 years.
How does this effect you: I think this is going to have one of the larger effects of the people of the GTA. With a shorter amortization period your mortgages is being paid off in fewer years which would mean you would have significantly higher mortgage payments. Let me break this down for you:
Average home price of $500k, with 5% down payment (total funds being mortgage: 475k), with a monthly payment, with a 5 years closed rate of 3.2%, over 30 years, your payment is $2054.22
Now if we leave everything the exact same except the amortization period and change it to the new mandatory 25 year maximum your monthly payment is $2303.23.
To some people this is not going to effect them but lets be honest, to the average family person living on a fixed family income that extra 300/month or 3600/year could be used to something else like your child's education saving plan.
The payment increase is not the only thing that we need to worry about. If the average house is 500k and your mortgage is now 25 years instead of 30 years, your payment is 300 more/month this means what?! YOU NEED MORE INCOME TO QUALIFY (in Ottawas and the banks eyes). So what you "could afford" yesterday, the bank might say "you can not afford" today. To me this doesn't seem fair but its a precaution for Ottawa to ensure that people are not over extending with their debt. House prices are not going down right yet but what you can technically qualify for is.
What I think is going to happen in the industry: a lot more people are going to be using mortgage brokers compared to walking into a bank and getting it done yourself. Mortgage brokers are creative, work with many lenders that they have established a relationship with and are able to do a lot of things we would think are impossible. House prices are not dropping right now last month even though sales went down prices still rose. People need somewhere to live. People rather buy than rent. People have the money they just need someone to get it done and mortgage brokers have the answers we are all looking for. The rental market will also get stronger. Some people will rather save up more before purchasing.
3. Capping the Maximum Debt Ratios: The federal government has decided to cap the maximum debt ratio and limit CMHC insurance to homes less than a million. So what does this mean: that if your purchasing a home more that a million, you have to put down 20% down payment. You will not qualify for CMHC anymore.
Professionally I do not think this is a bad thing. Interest rates have been at a historic low for the last couple years. What is going to happen to people when the interest goes back to a "normal" rate (not what we have been considering a normal rate for the last couple years).
To help clarify I have included this example to show what an increase in interest will do to your monthly payments:
If you owe a million dollars, with a monthly payment, with a 5 years closed rate of 3.2%, over 25 years, your payment is $4846.79 NOW if we only change the interest rate to 6% your monthly payment is now $6398.07/month. Thats a big difference.
All and all I hope you all have a better understanding of what these new rules mean and how they are going to effect all of us. If you need any further information you can send me and email at astramulawka@hotmail.ca.
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