Canadian media is in a tizzy over the recent announcement that the maximum amortization period is being reduced from 35 years to 30 years for government-backed insured mortgages. However, most of these new outlets are only telling half the story.
Essentially, the rules give Canadians less time to pay off their loans, in an attempt to minimize the impact of high-ratio mortgages. In laymen's terms, these are mortgages with small down payments, typically less than 25% of the purchase price.
First-time and young buyers are likely to be the most affected, as mortgage borrowers will now be required to make higher monthly payments on their mortgages.
But these higher monthly payments aren't as scary as they sound. Looking at a $200,000 property with a 5% fixed interest rate, the difference between a 35 year amortization and a 30 year amortization is an extra $64.54. In other words, if you can already afford $1,002.85 a month, you can probably afford $1,067.39 a month.
If you have to wait one more year to get that raise at work, which will allow you to purchase a home, there's still 5-years less of your life devoted to paying off that mortgage. That's what these new rules do for you: they get you out of debt faster.
Some news outlets are saying that down payments are rising as well but Finance Minister Jim Flaherty and the government say this isn't true. The minimum down payment will remain at 5%. (On our example house above, that's just $10,000.)
These rules may seem unfair for the few who can't make the difference in monthly payments but there's a much larger picture: the Canadian economy.
It's important to remember that the huge housing crash in the United States was largely caused by banks giving mortgages and loans to people who couldn't actually afford to pay them back. In comparison, Canada was less generous with loans and wasn't hit as hard. That's not to say we haven't been affected, but you're less likely to find entire communities of foreclosed homes in our neighbourhoods. This new government initiative will help keep it that way.
A stiffened mortgage policy can be discouraging for new home owners and lower income families but once home buyers understand what the new mortgage rules mean for them, they can then find solutions to move forward and purchase the house they want.
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