Tag Archives: Amortization Period

Mortgages changes you need to know

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The world might be able to learn something from Canada about avoiding another housing-related financial meltdown, as the government recently announced several changes to the rules governing government insured residential mortgages. These changes are designed to reduce leverage in the system and promote housing market stability in the country.

Background

The Canadian housing market and financial system have worked their way through the global recession and financial crisis in much better condition than the United States and many other countries. Average home prices in 2009 were higher than in 2006 in virtually every Canadian market.

Despite this performance, the government has been concerned with the average level of household debt and has made several changes over the last few years. The latest changes were announced by Jim Flaherty, the Minister of Finance, on Jan. 17, and these changes affect government-insured mortgages and home equity lines of credit.

Maximum Amortization

The first rule change affects the amortization period on mortgages, which is the length of time that it takes to pay off the entire loan. The maximum amortization period is being reduced from 35 years to 30 years on mortgages where the loan to value ratio exceeds 80 per cent. The loan to value ratio is a common metric used in the mortgage market and is calculated as the mortgage principal amount divided by the appraised value of the property.

A reduction in the maximum term will result in higher payments for homeowners, but a substantial reduction in total interest payments over the life of the mortgage. If a homeowner has a $300,000 mortgage at 6 per cent, the five-year reduction in amortization will require an $88 higher payment every month, but that homeowner will realize interest savings of $70,924 over the term of the mortgage.

Borrowing Limit

Another change that the government is instituting is a reduction in the amount that a home owner can borrow against the value of their home during a refinancing. The new limit will be 85 per cent of the value, down from 90 per cent previously. A homeowner with a home appraised at $400,000, can now borrow up to $340,000 compared to the previous limit of $360,000. This $20,000 reduction means more equity in the home will be kept.

Home Equity Line of Credit

The final rule change is that the government will no longer insure home equity lines of credit that are non-amortizing. The concern here is that homeowners are rolling consumer debt into these instruments and therefore shifting the risk to the government. These are also riskier loans than first mortgages, with the majority of the lines structured as variable rate and non-amortizing or not requiring principal payments. Variable rates could mean increases in payment amounts, which could increase the risk of overextending the individual’s ability to pay.

The Bottom Line

The Canadian government has instituted several changes related to government-insured mortgages in an effort to promote housing market stability. These changes will reduce leverage in the system and are part of an effort to increase home ownership in Canada. The United States and other nations that were hit hard by the financial crisis and housing bust should probably consider similar measures.

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/mortgages-changes-you-need-to-know/article2003964/

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BMO: Time for Homeowners/Prospective Buyers to Stress Test their Budget

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Talk to a BMO Bank of Montreal banker about considering a bigger downpayment and reducing the amortization on your mortgage to save money

The housing market in Canada has seen existing Canadian home sales surge 76 per cent from their January lows. Not only that, in November, existing home prices spiked 19 per cent above year-ago levels, the second fastest clip in two decades. With record low interest rates, more people than ever are looking to purchase a home. However, BMO experts are predicting that interest rates will rise in 2010.

“We expect the Bank of Canada’s overnight rate target to climb from 0.25 per cent beginning in July 2010, to 4.25 per cent in mid-2012. In turn, consumers can also expect mortgage rates to increase,” said Sal Guatieri, Senior Economist, BMO Capital Markets. “While today’s ultra-low borrowing costs represent a unique opportunity to purchase a property, home buyers need to proceed with caution and keep in mind that renewal rates will likely be substantially higher in coming years.”

“Stretching the limits of your budget by choosing the maximum amortization period and a minimum downpayment leaves you little wiggle room to deal with an unexpected financial challenge,” said Jane Yuen, Senior Manager, Mortgages, BMO Bank of Montreal. “A meaningful down payment and shortening your amortization by making extra payments on your mortgage will save you tens of thousands of dollars in interest costs.”

http://www.newswire.ca/en/releases/archive/December2009/22/c5258.html

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Canadian Federal Changes Mortgage Rules

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Canadian home buyers should be reassured by the government’s changes to the rules governing mortgages and go forward with confidence when making a home purchase in 2009. If anything, things are looking more favourable this year for mortgage financing with the Bank of Canada rate now sifting at an historic low of 1.25 per cent. As a result, there will be significant pres sure on financial institutions to pass on the reduction when setting their mortgage interest rates.
Understanding the new rules
Changes to Canada’s mortgage lending rules, news of turmoil in global financial markets and problems in the U.S. housing market have some Canadian home buyers wondering about their homeownership options.
Fortunately, the news is good. Recent government changes to mortgage lending should have little impact on home buyer choices.
The federal government implemented new mort gage criteria, which came into effect on October 15.
They apply to individuals who purchase a home and obtain a mortgage with a down payment of less than 20 per cent from a federally regulated lender, such as a bank or credit union.
There are two major changes. First, the time allowable to pay off a mortgage, called the maximum amortization period, has been reduced from 40 to 35 years. And home purchases now require a minimum down payment of five per cent. Home buyers can no longer borrow 100 per cent of the cost of their new home, as they could do prior to the change.
The requirement for home buyers with a down payment of less than 20 per cent purchase mortgage de fault insurance remains unaffected by the new rules.
The new mortgage criteria will not make it more difficult for most home buyers get a mortgage with an affordable monthly payment. For example, the majority of buyers who chose a 40 qualified for a shorter mortgage, whether 25, 30, or 35 years. Put in dollar terms, reducing a 40-year, $200,000 mortgage with a six percent interest rate to a 35-year mortgage at the same rate increases the monthly mortgage payments by only $41, but saves the homeowner $49,000 in interest payments (Source: Department of Finance Canada).
Generally, most mortgage loans in Canada have five- year terms, after which the homeowner may choose a shorter amortization period or other payment terms that may be right for them at the time.
Canadians regularly exercise their options to pay down their mortgage debt sooner. In fact, most Canadian homeowners repay their mortgage in 15 to 20 years, or in far less time than the amortization periods affected by the new criteria.
While the changes won’t deny many people the chance to own a home, they will help ensure our housing market stays strong.
Genworth Financial Canada’s Homeownership.ca website has tips and tools such as a rent vs. buy calculator, advice from third-party industry experts and information on mortgage options for prospective home buyers. For new immigrants to Canada, the site includes a specifically designed section that explains the home buying process in seven different languages.

Canadian home buyers should be reassured by the government’s changes to the rules governing mortages and go forward with confidence when making a home purchase in 2009. If anything, things are looking more favourable this year for mortgage financing with the Bank of Canada rate now sifting at an historic low of 1.25 per cent. As a result, there will be significant pres sure on financial institutions to pass on the reduction when setting their mortgage interest rates.

Understanding the new rules

Changes to Canada’s mortgage lending rules, news of turmoil in global financial markets and problems in the U.S. housing market have some Canadian home buyers wondering about their homeownership options.

Fortunately, the news is good. Recent government changes to mortgage lending should have little impact on home buyer choices.

The federal government implemented new mort gage criteria, which came into effect on October 15.

They apply to individuals who purchase a home and obtain a mortgage with a down payment of less than 20 per cent from a federally regulated lender, such as a bank or credit union.

There are two major changes. First, the time allowable to pay off a mortgage, called the maximum amortization period, has been reduced from 40 to 35 years. And home purchases now require a minimum down payment of five per cent. Home buyers can no longer borrow 100 per cent of the cost of their new home, as they could do prior to the change.

The requirement for home buyers with a down payment of less than 20 per cent purchase mortgage de fault insurance remains unaffected by the new rules.

The new mortgage criteria will not make it more difficult for most home buyers get a mortgage with an affordable monthly payment. For example, the majority of buyers who chose a 40 qualified for a shorter mortgage, whether 25, 30, or 35 years. Put in dollar terms, reducing a 40-year, $200,000 mortgage with a six percent interest rate to a 35-year mortgage at the same rate increases the monthly mortgage payments by only $41, but saves the homeowner $49,000 in interest payments (Source: Department of Finance Canada).

Generally, most mortgage loans in Canada have five- year terms, after which the homeowner may choose a shorter amortization period or other payment terms that may be right for them at the time.

Canadians regularly exercise their options to pay down their mortgage debt sooner. In fact, most Canadian homeowners repay their mortgage in 15 to 20 years, or in far less time than the amortization periods affected by the new criteria.

While the changes won’t deny many people the chance to own a home, they will help ensure our housing market stays strong.

Genworth Financial Canada’s Homeownership.ca website has tips and tools such as a rent vs. buy calculator, advice from third-party industry experts and information on mortgage options for prospective home buyers. For new immigrants to Canada, the site includes a specifically designed section that explains the home buying process in seven different languages.

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