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| Matthew Chan |
These changes currently only affect default insured mortgages which apply when you have less than 20% down payment or equity in your home.
Below are the changes announced by the Finance Minister and you’ll notice I have highlighted for you how they impact home owners:
1. Reduce the maximum amortization period to 25 years from 30 years
Reducing the amortization means two things…. It potentially decreases the maximum mortgage amount you qualify for, as well as increases the monthly mortgage payments.
As an example of how this affects some future home owners… reducing an amortization for a $250,000 mortgage at the current 5 year fixed term rate from 30 years to 25 years is a difference of approximately $131 per month in payments
If you purchase a property and have a firm offer prior to July 9th, 2012 then you can still have a 30 year amortization even if your possession date may be after July 9th, 2012.
If you haven’t found the right property before July 9th, 2012, then you will need to obtain a revised pre-approval with a 25 year amortization. This MAY impact the maximum amount you now qualify for and of course increase your mortgage payments.
2. Lower the maximum amount Canadians can borrow when refinancing to 80% from 85% of the value of their homes.
This impacts existing home owners who may have planned to use some equity to maybe pay off other financial obligations/invest etc. You can still do this PRIOR to July 9th, 2012 and only have to leave 15% equity in your home. After July 9th, you will now be required to leave at least 20% of the property’s value as equity. However, if you are thinking of doing some renovations in the property in the future, we can still use a Refinance plus Improvements mortgage – if this is something you may be thinking of, call me and I can go thru the details as I am an expert in this unique type of financing.
3. Change the maximum Gross Debt Service ratio at 39% and the maximum Total Debt Service ratio at 44%
The two ratios mentioned are to determine affordability and what we use when qualifying you. The gross debt service ratio looks at your monthly housing costs in comparison to your gross monthly income. If you have an awesome credit rating, we used to be able to go as high as 44% for your Gross Debt Service Ratio… this is now capped at 39%. When we approve our clients, we are always slightly conservative and so don’t see this impacting borrowing or mortgage approval limits that much.
4. Maximum Purchase Price for an Insured Mortgage is capped at $1million
This new cap should not affect many families or first-time homebuyers for which the default mortgage insurance was originally created for. Based on MLS data CMHC forecasted the national average resale price of a home to be $372,700 in 2012 and $383,600 in 2013. If you live in either Vancouver or Toronto, the average price might be double the national average, but still does not exceed this $1 million cap.
UPDATE on Bank of Canada announcement
As you know, your variable rate mortgage, lines of credit and/or student loans are all based on the Prime Rate and as promised, here is your
personal update from me on the recent Bank of Canada announcement on changes to their Overnight Rate which in most cases impacts your Prime Rate.
At 9:00 am EST, Tuesday July 17th, 2012, the Bank of Canada again did what we expected them to do… they maintained their overnight rate. What this means to you is that the prime rate on your mortgage or line of credit will not change and remains at 3.00%. This is great news as you still have a great low rate and so continue to make the most of the low payments you will still have and maybe chat with a financial advisor about a Tax Free Savings Account or some RRSP contributions to trigger a potential income tax refund next year! If you don’t have a financial advisor, let me know and I’d be happy to recommend one to you.
Here is an excerpt of the announcement from the Bank of Canada and what
they had to say about their decision:
“While the economic expansion in the United States continues at a gradual but somewhat slower pace, developments in Europe point to a renewed contraction. In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand. This slowdown in global activity has led to a sizeable reduction in commodity prices, although they remain elevated. The combination of increasing global excess capacity over the projection horizon and reduced commodity prices is expected to moderate global inflationary pressures.”
The overall economic momentum in Canada is still sluggish but the Bank expects that growth will slowly continue. Based on this outlook, they have indicated they are unlikely to increase their rate in the foreseeable future although very much dependent on the continued trend. A change is likely to occur in 2013, it is expected to be gradual and controlled in line with economic recovery, both in Canada and globally. Remember any change to the prime rate since 1992 has only been by 0.25% at any ONE time.
Fixed rates haven’t changed much at all since the last announcement, at around 3.09% to 3.39% for a five year fixed term.
Based on this recent announcement, and the anticipation that the prime rate will still remain low for a while now, unless you feel otherwise, I’d recommend that you remain with your current variable rate product as the interest is very much lower than a fixed term rate right now. However, if having a fixed payment is important to you, call me so I can calculate what your new payment would look like and also if it is suitable for you. The next announcement on any change to the prime rate is September 5th, 2012 at which time I’ll be in touch again.
Yours truly,
Matthew Chan
Matthew Chan, AMP, CA, MBA
Mortgage Planner
Dominion Lending Centres - Downtown Financial
Tel: (604) 773-2775
Fax: (604) 648-9553
Email: matt@mortgageplan.ca
Web: www.mortgageplan.ca
