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Will New Mortgage Rules Cool Real Estate Markets?


Blog by Sara Kalke | January 19th, 2011


Will New Mortgage Rules Cool Real Estate Markets?

With the Canadian Government tightening mortgage rules, most sources agree that there will likely be a surge in real estate activity in the first quarter of 2011, where buyers lock in mortgages with 35 year amortizations. After March 18, however, affordability will be reduced somewhat, as 5 years is shaved off of the maximum amortization allowed for mortgages in Canada.

Wondering what effect this will have? The effect with be two-fold, of course: a) buyers will be able to afford less, b) buyers will be paying less interest.

Here is a summary of the numbers (courtesy of MiniMortgage):

Scenario 1:
- $450,000 mortgage (total borrowed),
- 3.9% interest,
- 35 year amortization

$1,957 Monthly Payment, total payments over the course of the mortgage: $822,025 - 45% of which will go to interest

Scenario 2:
- $450,000 mortgage (total borrowed),
- 3.9% interest,
- 30 year amortization

$2,114 Monthly Payment, total payments over the course of the mortgage: $761,201 - 41% of which will go to interest

In this scenario, reducing the amortization of the mortgage costs the buyer $157 extra per month, and saves the buyer $60,824 over the course of the mortgage.  Would you like to make $60,000 for $157 a month?  Now you understand why the Government of Canada is making these changes - for a small monthly sacrifice, buyers will take on significantly lower debt-loads, and be able to pay off their mortgages faster. Yes, I said it, PAY OFF A MORTGAGE!  Novel concept, but I predict that this will be the new focus for quite a few homeowners, who previously might have leveraged every penny of equity they had to finance new vehicles, vacations, etc. 

Globe & Mail News Article:  http://www.theglobeandmail.com/report-on-business/economy/economy-lab/daily-mix/will-mortgage-rules-add-chill-to-a-cooling-market/article1872574/