Fear not, knowledge is power and I am here to demystify these recently announced changes and work with you on a mortgage strategy that is right for your situation. While the changes do put restrictions on how much money can be borrowed and how long it can be financed for, we are still in some incredible times for cost effective borrowing. Let's take a look at what these changes mean to you......
Change #1: Amortization period reduction
The Gov't has reduced the maximum amortization period from 35 years to 30 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
In a nutshell this is being done to assist Canadians in ensuring they can pay down their mortgage in a realistic time frame. This will significantly reduce the total interest payments made on the overall mortgage, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
What this means to you: You need to ensure you are not buying more house than you can afford. Your monthly payments will be higher with a shorter amortization period. Make sure that your cash flow is sufficient to make all of your obligations. For instance, with an average mortgage amount of $350K with a 5 yr term and 4% interest rate. Going from a 35 year amortization to a 30 year amortization will increase the monthly payment amount by approx. $115 per month.
Change # 2: The maximum amount in terms of home value to debt has been lowered
The Gov't has lowered the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
What this means to you: It will be more difficult to use your home equity as a revolving line of credit. Decisions such as renovations, new vehicles, investments and vacations need to be weighed more carefully. The days of using your home equity as an ATM are coming to an end so choose your expenditures wisely and plan for the future. You also need to ensure that you have 15% equity available for your financing requirements (including refinancing) or you may find yourself without a mortgage lender willing to support you. This could be especially challenging for an existing homeowner looking at refinancing. Plan ahead!
Change #3: The Gov't is getting out of the business of backing homeowner loans
The Gov't is withdrawing insurance on backing lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.
What this means to you: Do not plan on having your home equity to shop with. Lines of credit will be granted at more traditional (higher) interest rates and you will need to shop around for a good deal.
While these rules will have a longer term dampening impact on some purchases, the good news about all of this is that the Bank of Canada has the pressure off to raise interest rates. Analysts are saying that we shouldn’t see any significant hikes in prime rate for the near future. In terms of what this means for the housing market….analysts were predicting a slight slowdown in 2011 anyway. They aren’t projecting these new rules to have any more of an impact than a slight drop in demand and some potential price normalization in some markets. If anything we might see an early start to the busy spring housing market as people taking advantage of the old rules while they are still being offered.
I invite you to work with me on a mortgage strategy that will meet your needs and take as much advantage of timing and the new rules as possible. Call or email me today for assistance.
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Email: elwells@telus.net
