Posts Tagged ‘New Mortgage Rules’
What’s more important, the story or the headline? These days, it’s seems like the latter. Most of us get our info in 140 characters or less (twitter)… anything longer and it’s lost next to an ad in one of those dated methods of information (newspapers).
With hardly any warnings or hints Jim Flaherty announced new rules that set the my twitter feed on fire. Realtors, Mortgage Brokers and the ever present “Condo Bubble Babies” posted details of Jim’s big announcement. The most common tweet was about amortization period shortening from 30 to 25 years… with that came the fear of hellfire and damnation for all.
… and then the phone started ringing. The online panic had spread, with most people being concerned with how the changes would effect their prospects (both of buying and selling). After several emails, and phone calls I figured a blog post would be best share with you the conversations I’ve had with them.
For starters, let’s clear up the biggest misconception. THE CHANGES DO NOT APPLY TO ALL PURCHASERS. Only if you’re purchasing with LESS THAN 20% need you read further. The changes announced on Thursday only apply to new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
If you haven’t already spoken with a bank or mortgage broker, here’s how to tell if you’ll be getting a government backed mortgage: If the downpayment is less than 20% of your purchase price these changes will affect you. So for that $350,000 condo you’ve been looking for, you’ll need at least $70,000 down to avoid the new rules.
Now let’s say you’re buying with less than 20% down, here’s what you need to know effective July 9th, 2012:
The maximum amortization period has been reduced to 25 years from 30 years. This was the biggest point being shared on the changes, so I wanted to spend a bit of this post describing what this means. I’m going to use a worse case scenario to illustrate the change. I’ll stick to a $350,000 purchase price and assume the buyer only has 5% to put down. A 3.29% fixed mortgage rate is pretty much the norm these days, so i’ll be using it in this example. If purchasing before July 9th, 2012 and amortizing for 30 years, you’ll be putting down $17,500 and you’re looking at a monthly mortgage of $1,493. Your CMHC premium will cost $9,809. After the 9th, you’d only be allowed to amortize for 25 years (max) making your monthly amount $1,668 (a $175/month difference). The good news is that the CMHC premium drops to $9,114 (savings of $695) AND your mortgage will be paid down 5 years faster with much less interest than before. I see a very small segment of the market being affected by the changes. Properties under $500,000 will probably see the biggest change since that’s the target range for first timers. My hopes is that the new rules will bring some relief to the over heated bidding wars we’ve been seeing!
The maximum amount Canadians can borrow when refinancing their home is 80 per cent instead of the former 85 per cent of the value of their homes. This change is aimed at the home owners looking to borrow against the equity in their home. It’s pretty straight forward and basically means you’ll have a bit less to borrow but more saved up in your home. I think this is a great move that creates even more stability in the Canadian market.
Purchasers can only put less than 20% down on homes (and condos) with a purchase price of less than $1 million. In my opinion, this is the most interesting of all the changes. Essentially the move puts a cap on the government backed mortgages to buyers with a purchase price of a million or less. With the new rules, you’ll need to put down a minium of $200,000. As limiting as the change may sound, the reality is that very few people buy million plus homes with less than 20% down. Most purchasers in this category are typically move up buyers, and if you’ve owned a home in Toronto for the last 10-15 years chances are you’ve probably seen gains of at least $200,000. As you may have heard, CMHC is nearing it’s limit to the amount it’s allowed to insure. I think this move was made to keep the program open to those who need it most – the first time buyer. Also, the cap add’s a new level to the guidelines. Down the road the decision makers may change the million dollar benchmark, especially with rising prices in the major areas like Vancouver, Toronto and Montreal.