Shalini Devid was excited about the prospect of buying her first condo. Then mortgage lending rules were tightened, choking her hopes of home ownership. At least for now.
Devid, a financial analyst who works in downtown Toronto and rents in Etobicoke, has been caught by the federal government’s move to reduce the maximum amortization period from 30 years to 25 years on CMHC-insured mortgages. (Buyers with a down-payment of less than 20 per cent of the purchase price are required to buy mortgage insurance through Canada Mortgage and Housing Corporation.)
The shorter amortization means higher monthly payments, equivalent to paying almost 1 per cent more on your mortgage rate.
“I was ready to jump right in and buy,” says Devid, who was looking for a condo in the $350,000 to $400,000 price range. “But the change in the amortization period made a huge difference.”
For example, a $300,000-mortgage at 4 per cent and amortized over 30 years would cost $1,426 a month to pay back. The same mortgage amortized over 25 years would cost $1,578 per month, an increase of $152.
After she did detailed calculations using different scenarios, Devid worried that, once she pays the mortgage, condo fees and utilities, she’ll be stretched too thin.
“Looking at monthly payments, (amortization) is one of the biggest things for me,” says the first-time buyer, who now thinks she’ll save for a few more years until she has a 20 per cent down payment.
“It’s unfortunate, because I’d rather be an owner than a renter,” she says.
Devid is not alone in her disappointment. Others who are caught in the amortization crunch are either putting off their purchase or buying less house, says Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals.
Since the lending rules changed last July, house sales have dropped more than 8 per cent, despite mortgage interest rates being at an almost record low, according to Murphy. He points out that 17 per cent of buyers who qualified for a mortgage in 2010 would not qualify today under the new rules, Finance Minister Jim Flaherty’s fourth round of changes since 2008.
In the past, Murphy says a “large percentage” of buyers opted for an amortization of 30 years or longer, for the flexibility in financial planning it offered. His organization is concerned about the impact of the changes on a real estate market that’s already slowing.
Brampton realtor Jaspal Cheema, who’s been helping Devid in her search, says first-time buyers are being squeezed out of the market, because they typically have a smaller down-payment.
“It’s hard to balance between emotions and pocketbook,” he says, noting the urge to buy is especially strong among immigrants.
Toronto mortgage broker Joe Walsh believes “there are still lots and lots of people who want to buy.”
Among the clients he sees for pre-approval are those who offset the impact of a reduced amortization by settling for property of a lesser value. One couple, for example, opted for a townhouse instead of a semi-detached home. Others may choose a less-expensive condo as a stepping stone to a single-family home.
"The aim of the new rules is to help homeowners curb their debt load"
The government is telling buyers: “We don’t want anyone pushing and pushing and getting into trouble,” he says. At the same time, lenders have been put on notice that “you’ve been a bit loose with the purse strings and you need to tighten them up.”
Along with the reduction in amortization periods, Walsh says the government also toughened underwriting guidelines, which translates into more paperwork for both buyers and lenders.
In the past, mortgage-seekers might have had to produce a letter from an employer stating their salary and a pay stub, but now it could be a letter, two pay stubs, a tax return and a notice of assessment.
But there is a silver lining to the amortization cloud: With five fewer years to pay off a mortgage, home owners will see substantial savings in interest charges. That $300,000 loan, for example, will cost almost $47,000 less than if it was repaid over 30 years
*Compliments of thestar.ca*
TIP OF THE WEEK!!
Budget your money! When you go to get pre-approved for a mortgage banks will take anywhere between 40-44% of your BEFORE tax income, and does not take into account utility bills, insurance bills, and misc. monthly expenses. This means that you may be able to afford a $300,000 home on paper, however, if you don't do a break down of what you actually take home every month vs. what you spend you may end up in a tight position. As you can see from the above article the new rules can effective you today but can save you thousands in the true cost of home ownership.
Are you looking for a Realtor in Halifax? Thinking it may be the time to sell but arn't quite sure? Thinking about when you should make the move and set out to make a purchase? I can quickly provide complimentry pressure free appraisals or answer any questions you have regarding mortgages, renos and real estate. Contact me or feel free to leave a public comment or question below. Follow me on Twitter and Facebook to see more updates and see what is going on in Nova Scotia real estate.
Jason Shadbolt, BMgt
As a Realtor, Builder and previous Mortgage Specialist, if you have questions, all you have to do is ask!