Wondering how today’s Canadian changes in mortgages rules will affect you as a Buyer or Investor? Read on…
Rule Change #1 – Amortizations reduced to 25 years, from 30 years
The good news is that this change will mean paying less interest over time…but it does mean that everybody’s budget likely just came down. For example (all numbers approximate):
$2,500 monthly mortgage payment at 3% interest rate gets you:
- $595,000 mortgage over 30 years
- $530,000 mortgage over 25 years
- Over $80,000 saved in interest over the life of the mortgage
$1,500 monthly mortgage payment at 3% interest rate gets you:
- $360,000 mortgage over 30 years
- $320,000 mortgage over 25 years
- Saves $50,000 in interest over the life of the mortgage
So if your monthly budget max is $1,500, last week you were looking at $360,000 condos and as of July 9th, you’ll be looking at condos in the $320,000 range.
Of course many of you were never looking at the 30 year option anyhow, in which case, you aren’t really affected.
This change is significant for investors though, as investors generally try to amortize their payments over as long a period as possible (because the interest is a tax write-off). After tax income and cash flow will certainly be affected by this change.
For those of you who bought pre-construction and won’t be getting your condo and mortgage until next year, this could certainly affect your payments. Hopefully you never counted on the 30 years amortization period, and at least you’ll have some time to save up some cash. You might want to review your offer to see if you were guaranteed any kind of financing from the builder’s lender.
Rule Change #2 – Insured mortgages no longer permitted on properties over $1 million
This will mean that Buyers with less than a 20% down payment will have to focus in the under $1 million market. Most Toronto Buyers in this price bracket have bigger down payments anyhow and it’s always a good to get as big of a downpayment as you can handle. I’m curious to see how the pre-construction purchase of a $1.5 million property with a 15% deposit that isn’t ready until next year will get financed.
Rule Change #3 – Lowered Gross Debt service and Total Debt Service Ratios
This probably won’t affect Buyers much, as most lenders were already applying stricter standards to the ratios they use to determine how much a Buyer can afford. I suspect this is just to keep the banks in line!
Rule Change #4 – Home Owners can only refinance up to 80% of the appraised value of their house
If you’re looking to take equity out of your house to buy another property, things just got harder. I predict this will be good for all homeowners in the long run.
So what’s a Buyer to do?
- If you were already in the market to buy, taking advantage of the longer amortization periods by buying before July 9th could be advantageous to you (assuming you close before December 31st)
- If you don’t have the down payment ready, have a read of our Downpayment Strategies for First Time Buyers blog – this might be the time you want to borrow from the bank of Mom and Dad.
- Should you wait for prices to come down? It’s almost impossible to time the market, and to be honest, I don’t think these changes will greatly affect the prices in the long-run. I think the vulnerable parts of our real estate market are vulnerable for other reasons, and I think the strength of our economy, our banking systems and our city won’t allow a US-style crash to happen.