What New Mortgage Rules Mean

CMHC Mortgage Insurance Rules Changes

Effective Monday, July 9, 2012, the Canadian Mortgage and Housing Corporation (CMHC) only provides mortgage insurance for loans with an amortization of 25 years or less when the borrowed amount is 80% or more of the property value.  Canadian law requires insurance on mortgages that exceed 80% of a property's value.

Amortization - This lowers the amortization limit from the 30 year maximum set out in 2011.  It was as high as a 40 year amortization in 2006, but the amortization period has been lowered by the federal government over the past several years in an effort to encourage consumers to pay off debts more quickly.

Debt Ratios - The government has also set the maximum gross debt service (GDS) ratio at 35% and the maximum total debt service (TDS)  ratio at 42% in order to qualify for CMHC insurance if you have a beacon score of less 680.  The ratios are at a GDS of 39% and TDS of 44% if the beacon score is over 680.  We calculate the GDS by adding up mortgage payments, property taxes and heat costs, and dividing by the borrower's income. TDS adds in other debt payments such as lines of credit and credit cards to get total debt payments.

Which Mortgage Is Best?

There are a variety of mortgages, and each one has its advantages and disadvantages.

A fixed rate, closed mortgage - about 75% of mortgages across Canada are fixed rate, closed mortgages.  Typically someone locks in their rate and payment for 5 years.  This lets consumers know what their payment will be every month and how much will be left on the mortgage at the end of the 5 year term.

A variable, closed mortgage - this mortgage has a rate that floats with a financial institution's prime lending rate and is often for a 5 year term.  Usually the payment is set at the current rate and then the actual interest rate goes up and down throughout the mortgage.  The advantages are that this rate is usually lower than a fixed rate and that if the rate decreases your payment is paying more towards the mortgage principal.  However, the disadvantage is that if the rate goes up you will pay more in interest and it is possible that very little of the principal is paid down by the end of the term.

Rent Vs Mortgage

Over the past 20 years Canadians have decided that owning a home is a great financial investment.  While owning a home has many advantages, there are also many reasons you may not want to own a home.  The following is a short list of some of the main reasons for and against owning a home:

Pros -

• Sense of ownership
• Build equity in an asset rather than paying it all to someone else
• A house usually grows in value at, or above, the inflation rate
• Privacy
• Freedom to do what you want with the house for decorating and renovations
• Financial security for retirement

Learning From Someone's Money Mistakes

I had someone tell me a bit of a depressing story about a month ago.  I'm sharing it here because I beelive we can all probably learn something from it.

This person's son and daughter-in-law were eager to buy a home in the middle of the job/housing boom.  They were told repeatedly by family members that owning a house would be better than renting, even though the couple really didn't have a down payment.  They took about a year of scraping together a 5% down payment plus the CHMC insurance fee and went off to see someone about a loan. 

FP - Golden Years Postponed

Just a few articles from various sources this past week that I thought you might find of interesting.

Financial Post - Golden years postponed
Globe Investor Blog – How to avoid taking on too much mortgage debt
Financial Post, Wealthy Boomer – Canadians flunking test on TFSA
Financial Post – Crack that nest egg

I'm not trying to create a downer of a post, it's just that the articles came out that way this week.
Jerry

Are low interest rates actually good?

Mortgage rates look really good right now.  They have never been as low as they have been in 2009, and they probably won’t be returning to these lows again any time soon.

The low mortgage rates have helped a lot of home owners to pay down their mortgages more quickly because of lower payments and lower inters charged.  The rates have also caused some people to purchase a home they probably can’t really afford.  Let’s look at the numbers:

You are purchasing a $340,000 home and have about $90,000 to put down, meaning you need to get a $250,000 mortgage.