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Mortgage Changes - what they mean for you

Blog by Sara Kalke | June 21st, 2012

This morning, the Government of Canada announced several changes to mortgages. 

The details:
  • Amortization period is REDUCED to 25 years for high ratio applications. Banks can continue to offer 30 year amortization on LTV's 80% or less.
  • Refinancing is reduced from 85% loan-to-value to 80%
  • Formally limited gross-debt-service ratio of 39%, total-debt-service-ratio of 44%
  • Maximum purchase price for government-backed mortgage insurance is $1 Million.  Homes above $1 Million must have 20% down payment

In English:

  • Amortization is the total length of time you are borrowing money from the bank to buy your house, most mortgages now have 30 year amortizations, the change shortens that timeline to 25 years.  Click HERE for definitions of mortgage terms).  For most of our lives, mortgage amortizations were actually 25 years - it wasn't until the greedy 90's and early 00's when buyers and banks allowed 40 year amortizations. 
  • So, if your amortization is changed, it means if you are borrowing the same amount of money, your payments will be higher, or if you want your payments to stay the same, the amount you can borrow is lower.  I.E.  I borrow $1,000 to buy a mountain bike.  I say I will pay that back over three years (three years would be my amortization), to make things simple, there's no interest.  My monthly payments would be $1,000/36 months = $27.77/month.  If my amortization changed to two years, my monthly payments would be $1,000/24 = $41.66/month.  For mortgages, here's how it shakes down (courtesy of Len Lane, Verico Brokers for Life):

Purchase of a 300000 dollar home with 5% down payment.

40 Yr Amort monthly payment $1060.00 qualifying income $40000.00
30 Yr Amort monthly payment $1248.00 qualifying income $46000.00
25 Yr Amort monthly payment $1399.00 qualifying income $52500.00

  • Refinancing refers to when it comes time to get a new loan on your home - often people refinance if they want to use the equity in their homes for something else, like say a new yacht, or an investment property ; )
  • Debt ratios refer to the amount of money you can owe at any given time.  The banks don't like you to owe 100% of your monthly income to debt (uh obviously), so that you can actually pay them back every month.
  • Homes above $1 Million - now you need 20% down to buy a home over a million dollars.  Most people don't seem to have this issue...  Those that are buying over a Million will most likely have to liquidate stock or other assets before making a purchase.

TIMING is crucial... we are being told that if you want to qualify with a 30 year amortization, you have until July 9.  So pick up the phone and get in touch with your mortgage broker or bank.  Let me know if you would like a list of professionals.

While this is BIG news in some ways, keep in mind a few things: 
1)  this has happened twice before - the government reduced amortizations from 40-35 years and 35-30 years respectively in the last couple years.  The result each time it happened was not nearly as exciting as you'd think... in Edmonton, there was a burst of purchase activity both times while buyers with approvals at the longer amortizations bought what they were already planning on buying.  The real estate market in Edmonton remained fairly steady afterwards. 
2) the government is doing what it has actually done pretty well - kept our financial system sound.  Remember the foreclosure crisis of the US (just kidding of course you haven't forgotten)?  Remember how that didn't happen in Canada?  The government is being overly cautious in my opinion, but wouldn't you rather be a homeowner in a country whose government is cautious rather than reckless?

Questions?  Contact me anytime: (780) 710-7669