New Mortgage Rules

Starting on July 9th, the maximum amortization period for a new mortgage will be 25 years, down from 30 (only if it’s insured by CMHC.)  This is a measure introduced by our finance minister to cool the housing market. This works because if someone wanted to buy a home today with a $300,000 mortgage, they can pay it off at $1512 a month in 30 years. But once the amortization rules change to 25 years, they have to make larger payments, ($1660 a month) in order to pay off the debt in a shorter period of time. Not a big difference, but it might be enough to make some people think twice about buying that home. For potential buyers who could afford a $300,000 mortgage today, might have to settle with something cheaper starting next month. I predict real estate prices will drop a little bit from July to September this year.

This is welcomed news for many in the economy. A lot of workers are really relieved because instead of raising interest rates to combat housing prices like the government usually does, this move does not hurt anyone working in the export or manufacturing sector. Landlords will also like these new changes. Since it will be more difficult to finance a home, people who are currently renting but are saving to buy their own place will need to save even more money for a downpayment before buying the home they want. This is also great news for home buyers who were planning to finance their mortgage for 25 years or less anyway. It will lower the prices of homes without affecting their original plan at all ^_^;. Some people think if you can’t pay off a mortgage in 25 years then you probably shouldn’t buy it in the first place (I don’t agree with that saying though.)

I’m not a big fan of this change myself.  It limits my choices so I can’t choose between 25 or 30 years anymore. But I understand why they thought these new rules will be good for the economy. I personally don’t think we’re in a real estate bubble and prices are going to crash. But I know a lot of people will disagree with me when they see houses like the one below selling for over $2.5 million :).

edit post: As B-Plus kindly mentioned below, if your mortgage is not insured by CMHC then these new rules don’t apply to you. For more info about your personal situation please ask your lender, bank, broker, etc :).

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Random Useless Fact: According to names.whitepages.com there are dozens of people in the United States (as of February 2011) with the first name “LOL“.

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Modest Money
06/25/2012 7:54 am

It will be interesting to see what affect these new rules do have on the housing market. Here in Vancouver the high prices are largely fueled by foreign investors. This definitely wouldn’t slow them down. So I doubt our housing prices would change much. It should help other areas though. I personally don’t mind the rules for my own decision though. I had been considering a 30 year mortgage, but really, I definitely don’t want to spend so long paying it off.

Liquid
Admin
06/25/2012 3:28 pm
Reply to  Modest Money

Yup, much of BC’s economy is bolstered by foreign capital. Wish I was a foreign investor too. Those people have seemingly bottomless pockets.

PC
PC
06/25/2012 11:32 am

I got a pre-construction condo out in New West but it’s not going to be done till end of 2013!! I just hope this doesn’t have a negative effect on the housing prices in the Lower Mainland, since I got my feet wet already. It would really suck to buy at the top of the markets.

For people who are in real estate, they’re adament there’s no bubble. For people who are waiting to get into real estate, they’re anticipating a price reduction.

Liquid
Admin
06/25/2012 3:30 pm
Reply to  PC

That’s so exciting. I got brochures from many developers planning to build in the New West / Surrey area. I would’ve bought one if I had the money at the time. Looks like it’s getting harder to do that now though.

Julie @ Freedom 48
Julie @ Freedom 48
06/25/2012 7:18 pm

I’m not a fan of the changes. I like having the choice – and the leverage.
We purchased our home in 2009 on a 35 year mortgage – and have already paid it down to 20 years. While we’d never take 35 (or even 25) years to pay off a mortgage… I like having the option to go with the 35 or 30 year ammortization – knowing that my actual monthly obligation is much lower. Kind of like a safety net… should either of us lose our job.

Liquid
Admin
06/26/2012 8:31 am

I also bought my home in 2009 and went for a 35 year mortgage. That’s great you guys are down to 20 years already. I’m still at 32 🙂

MyMoneyDesign.com
MyMoneyDesign.com
06/26/2012 8:25 am

I wouldn’t be that upset with a 25 year mortgage. Especially knowing what trouble risky mortgages have caused in the past. I recall there being 40 year mortgages. What was up with that?

Liquid
Admin
06/26/2012 8:50 am

I’m definitely guilty of being one of the risky buyers. I paid 5% for my downpayment.

Not Working
Not Working
06/26/2012 2:45 pm

Already have on 25 years, think this is the max i feel confortable with

Liquid
Admin
06/26/2012 2:48 pm
Reply to  Not Working

Nice. It used to be 25 years a long time ago. Then the government changed it to 40 years and is now slowly working their way down again. I just hope they don’t go lower than 25 (O_o).

B-Plus
B-Plus
06/26/2012 4:01 pm

Maybe I misunderstood the announcement, but I thought the new maximum of 25 years was only for CMHC insured mortgages. So if you have at least 20% for a down payment, you could still get a longer amortization, subject to the lender’s approval.

Liquid
Admin
06/26/2012 4:14 pm
Reply to  B-Plus

You’re absolutely right (^_~). I should have clarify that in my post. Personally I wouldn’t apply for a conventional mortgage (a mortgage with at least 20% downpayment.) But I’m sure lots of other people would. Also, just pointing out these new rules are for residential buildings only :D. Actually, multi-residential buildings can still be amortized for 35 years, according to Royal Bank. And commercial properties have different rules as well. Thanks for catching the technicality :). I’m going to make the change now.

Vlierden
Vlierden
06/26/2012 9:12 pm

I paid 5% down and have a 40 year mortgage, I have to renew next year, since my mortgage is about 2.5 times my income I do not call myself a great risk, the reason I took a 40 year mortgage is to create more cash flow for investing with the purpose of incresing my income which makes me an even smaller risk. The only good thing about the 25 year mortgages is that it keeps the house prices down.

Liquid
Admin
06/26/2012 11:01 pm
Reply to  Vlierden

I was too late to catch the 40 year mortgage trend so mine is only 35 years, but renewing it next year as well. 2.5 times your income isn’t a great risk I agree. When I got purchased my condo in 2009 my mortgage was about 4.5 times my income and I didn’t think it was a big deal. Today I’ve managed to get it under 4 times though. I think banks should use after tax income instead of pre-tax income to qualify potential borrowers. It’s a little more complicated to calculate but it gives a much better picture of someone’s cash flow and their ability to pay a mortgage.