Will my Amortization change at Renewal?

Prime Minister Stephen Harper (Photo credit: University of Saskatchewan)

No.

This is a question I keep hearing since the government has reduced the maximum amortization.  The answer is no it won't.  If you renew with your current lender then nothing will change.

If you change lending institutions at renewal (called a switch) it's the same contract and all the terms must be honoured by the new lender; although a new lender will have to re-qualify you using the new debt ratios.

If you decide to refinance or take equity out of your home then you are creating a new contract which would then be subject to the new rules.

It's also important to remember that these rules only apply to high ratio mortgages which had less than 20% down payment or equity at origination.  The lenders get to choose their own policies for conventional mortgages.

Questions about renewing or switching - call me.  I'm never too busy to talk real estate!

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Fixed vs. Variable

Mortgage rates historical trends
(Photo credit: Wikipedia)

This is the mortgage question that seems to get the most attention so I thought I'd add my two cents to the mix.

The benefits of a fixed rate is simple:  you know exactly what you're going to be paying for the term of the mortgage.  It's the secure choice.  Draw backs of fixed is that you will generally pay more (statistically 88% of the time).  You'll also qualify for more money with a five year fixed because we use the actual rate to qualify you.  Variables and shorter term loans use the Bank of Canada five year posted rate which is about 2% higher.

The benefit of a variable is exactly the reverse:  you generally pay less but you're gambling with the rates.  This becomes a safer bet if you have a good working knowledge of the world economy (or you have a stellar broker like me to advise you:)  A second benefit of a variable is there's no Interest Rate Differential which can cause those really big penalties if you pay it out early.  It'll just be a straight three months interest.

When choosing a mortgage it's important to consider several things.  First of all, how long before you plan to sell or refinance.  If you're going to sell in one year there's no point in a five year fixed.  A shorter term or a variable would be more appropriate or even an open mortgage (no penalties but higher rate) if you're going to sell within a few months.

Let's assume you're going to keep your house for at least five years.  There are three things I consider when deciding what to recommend to a client:  one is the spread between fixed and variable.  Right now it's only about a tenth of a percent so there's not much savings there.  Normally the spread is closer to 1.5% which makes a much bigger difference.

The second thing I consider is where are rates going.  At the time I'm writing this I expect rates to stay low for two to three more years and then start rising.  With very little spread it would only take a single rate hike to undo any savings with the variable.

The third factor is how well can my clients handle a fluctuating payment.  If the payment goes up significantly do they have a savings account or liquid investments to tap into if they get in  trouble?  Have they bought less than they can afford or are they maxing out their income.  The more secure your financial situation  the more you can afford to gamble with saving money.

Another strategy that I like is the one year fixed strategy.  This allows you the flexibility to renew, refinance or sell every year without penalty.  You get rates that are closer (or lower) than variable rates and it provides a lot of flexibility.  It doesn't have the stablity of the five year fixed but it's a highly flexible option that I like especially for investment properties.

And for all you fence-sitters out there, you can enjoy a 50/50 mortgage where half the balance is in a five year fixed and half is in a five year variable.

If you have any questions about your own situation and what would best suit your needs, please call me.  I am always happy to discuss your options.  And remember, my services are free.

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New Mortgage Regulations for 2012

FINANCE MINISTERS MEETING, DECEMBER 19, 2011, VICTORIA, BRITISH COLUMBIA (Photo credit: BC Gov Photos)

Effective July 9th, the Minister of Finance introduced new rules affecting mortgage lending in Canada.  The idea behind these changes is to avoid rapid deflation in the housing market (like the US experienced) by preventing homeowners from taking on as much debt.

The changes include limiting the maximum amortization to 25 years.  The amount you can afford is based on monthly income and payments so a shorter amortization means a larger payment which means you can afford less.

The government has also set a maximum Gross Debt Service Ratio (GDSR) at 39% where before it was unlimited if your beacon score was over 680.  If your beacon score is under 680 then you have always been limited to 35%.  GDSR is the total monthly payments for housing (mortgage, property taxes, heat, and 50% of condo fees).

The effect of these two rules?  Someone with good credit, 5% down payment, and an $80,000 annual income with no debt could conceivably have qualified for a home priced at $608,000 last week.  This week they would shopping for a home worth $476,000.  Certainly a reasonable amount in most markets but it's the difference between a house and an apartment is you're in the Vancouver/Toronto areas.

The third change was to decrease the amount of equity available for refinancing.  If you want to access the equity in your home you can only take out 80% now, down from 85%.

And lastly, if you're in the market for a home worth more than $1 million then you will have to come up with a 20% down payment

These new regulations will be enforced through the Canada Mortgage and Housing Corporation (CMHC) so will only affect high ratio mortgages with less than 20% down payment.

I get a lot of inquiries about whether the down payment rules have changed.  They have not.  You can still purchase your primary residence with 5% down (10% if you're self employed and stating your income).  Everything else requires 20%.

If you have any questions please comment below and I will respond promptly.  There are no stupid questions.

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