New Canadian Housing Rules – CMHC to Reduce High Ratio Insured Mortgage Amortizations
Further to last week's article and Ministers Flaherty's announcement last week concerning changes that are being made to CMHC lending guidelines as it relates to mortgages that are high ration insured by CMHC.
These changes further scale back on some of the more aggressive lending practices that have become more common in the past 10 years. These include reducing the amount of equity you can refinance out of your home (the topic of last week's article) from 90% loan to value to 85% loan to value. It also includes CMHC withdrawing high ratio coverage on some home equity line of credit products and reducing the current insurable maximum mortgage amortization from 35 years down to 30 years.
If you really think about it, it does not make good financial sense to obtain a mortgage payment based on a 35 year amortization. Doing this literally means stretching out the payments so long that you will see very little principal repayment to your mortgage in the first 10 years. If you outgrow your home and may move in the future, don't you want to know that your mortgage payments actually paid down some of your mortgage principal, creating equity.
As a rule of thumb we recommend that those who are shopping for a home, shop in a price range where their mortgage payment is based on a 20 year amortization. If you absolutely love the house, stretch it to 25 years. Let's compare a $300,000 mortgage with a 5 year term at 4% interest based on a 20 year amortization vs. a 35 year amortization.
The 20 year mortgage would bear a monthly payment over the 5 year term of $1,812.74 and the principal balance at the end of 5 years would be $245,615.71.
The 35 year mortgage would bear a monthly payment over a 5 year term of $1,322.41 and the principal balance at the end of 5 year would be $278,096.99.
While the 35 year amortization may give you $490.33 per/month in extra cash flow, it will cost you so much in the end in interest that it's not really worth it. If the 20 year payment is too much then this it is time you ask yourself "Self, is this too much of a mortgage for you?" and consider looking for a home that is more affordable.
Those of you who are currently in a 35 year mortgage, what does this mean to you? Well that remains to be seen. Some have speculated that when these 35 year mortgages come up for renewal that they will have to be renewed at a 30 year amortization. This is in addition to the fact that the Bank of Canada has raised interest rates a couple of times this year. It may be time to tighten the budget in preparation for a larger mortgage payment when your mortgage comes up for renewal.
There once was a time where the maximum mortgage amortization was 25 years and it seems that the Canadian Government and CMHC appear to be moving back in that direction. At the end of the day a home is one of the single biggest investments that most will make in their lifetime. Negotiating financially responsible mortgage terms and living within your means will help you maintain a strong financial profile whether the economy is good or bad. For more information about the new Canadian Housing Rules announced by Minister Flaherty with respect to CMHC reducing high ratio insured mortgage amortizations please visit www.trueassess.com.
These changes further scale back on some of the more aggressive lending practices that have become more common in the past 10 years. These include reducing the amount of equity you can refinance out of your home (the topic of last week's article) from 90% loan to value to 85% loan to value. It also includes CMHC withdrawing high ratio coverage on some home equity line of credit products and reducing the current insurable maximum mortgage amortization from 35 years down to 30 years.
If you really think about it, it does not make good financial sense to obtain a mortgage payment based on a 35 year amortization. Doing this literally means stretching out the payments so long that you will see very little principal repayment to your mortgage in the first 10 years. If you outgrow your home and may move in the future, don't you want to know that your mortgage payments actually paid down some of your mortgage principal, creating equity.
As a rule of thumb we recommend that those who are shopping for a home, shop in a price range where their mortgage payment is based on a 20 year amortization. If you absolutely love the house, stretch it to 25 years. Let's compare a $300,000 mortgage with a 5 year term at 4% interest based on a 20 year amortization vs. a 35 year amortization.
The 20 year mortgage would bear a monthly payment over the 5 year term of $1,812.74 and the principal balance at the end of 5 years would be $245,615.71.
The 35 year mortgage would bear a monthly payment over a 5 year term of $1,322.41 and the principal balance at the end of 5 year would be $278,096.99.
While the 35 year amortization may give you $490.33 per/month in extra cash flow, it will cost you so much in the end in interest that it's not really worth it. If the 20 year payment is too much then this it is time you ask yourself "Self, is this too much of a mortgage for you?" and consider looking for a home that is more affordable.
Those of you who are currently in a 35 year mortgage, what does this mean to you? Well that remains to be seen. Some have speculated that when these 35 year mortgages come up for renewal that they will have to be renewed at a 30 year amortization. This is in addition to the fact that the Bank of Canada has raised interest rates a couple of times this year. It may be time to tighten the budget in preparation for a larger mortgage payment when your mortgage comes up for renewal.
There once was a time where the maximum mortgage amortization was 25 years and it seems that the Canadian Government and CMHC appear to be moving back in that direction. At the end of the day a home is one of the single biggest investments that most will make in their lifetime. Negotiating financially responsible mortgage terms and living within your means will help you maintain a strong financial profile whether the economy is good or bad. For more information about the new Canadian Housing Rules announced by Minister Flaherty with respect to CMHC reducing high ratio insured mortgage amortizations please visit www.trueassess.com.