Change to the mortgage rules.
Are you aware of recent changes to the mortgage rules?
Downpayment – Cough Up The Cash
As of February 2016, homebuyers in Canada now face larger down payment requirements for properties over $500,000. Buyers now have to put a minimum downpayment of 10% on the portion of a home over $500,000.00. As an example, let’s take a home listed at $800,000.00. That means the minimum downpayment will rise to $55,000.00 from $40,000.00 - an additional $15,000.00. While homeowners who are “sizing up” to a bigger or more expensive property likely won’t feel the hit of the changes due to the fact they can leverage the proceeds from the sale of their existing property, the added requirements will potentially price first time homebuyers out of the market.
Homes over $1 million continue to require a 20% downpayment and mortgages for homes worth more than $1 million can no longer be insured.
Amortization Rates – Every Penny Counts
Insured 30-year amortizations have become a thing of the past. With the new mortgage rules, the maximum amortization period has dropped to 25 years giving borrowers less time to repay the debt in full. Let’s think of it this way… For every $100,000.00, it is about a $60.00 difference and in an expensive market, every penny counts. Having said that, if we look at a $350,000.00 mortgage with 3% interest, monthly payments increase by $184.00 over what they would have been with a 30-year amortization. Over the lifetime of the mortgage, however, the homeowner will save $33,052 in total interest payments because the home would have been paid off 5 years earlier.
Total Debt Service – Don’t Bite Off More Than You Can Chew
The new mortgage rules insist that prospective buyers have the means to afford their prospective property. Total Debt Service (TDS) is the share of a borrower’s gross income needed to pay for all debts, including those relating to home ownership. This number has been limited to 40% and is aimed at making sure borrowers can’t bite off more than they can chew.
Shorter amortizations, higher qualification rates and lower debt ratio limits will restrict buying power. Questions on how this might affect you? Call me. I can help.