On March 18th, 2011 the Canadian federal government will implement new mortgage rules as follows:
1. The amortization of high-ratio mortgages (where the down payment is less than 20%) will be reduced from 35 years to 30 years
2. Canadians can only borrow 85% when refinancing a home, down from 90%
3. The government will no longer insure lines of credit secured by homes, ie. Home equity lines of credit (To be implemented April 18th 2011)
I would like to point out some positive and negative aspects of the first rule above for home buyers
If you’re planning on paying less than 20% down on a home, you will not have the option of extending your mortgage to 35 years after March 18th. This will result in higher mortgage payments.
Let’s look at an example of a condo worth $250,000 with a 5% down payment ($12,500), at 4% interest and insured through CMHC. A 35 year amortization period will result in payments of approximately $1077. A 30 year amortization period will increase your payments to $1162.
(-) Your payments increase $85/month
(+) This saves you over $34,000 in interest over 30 years
(+) You will pay off your mortgage 5 years faster
(-) If you cannot afford the extra $85/month, you will need to save up more than double the down payment to have payments equal to $1077
If you are considering purchasing a home this year, your first step should always be to organize your finances. I recommend setting up an appointment with a mortgage specialist to discuss your situation and find out what your options are. Please feel free to contact me and I can refer you to a mortgage broker.
