“...they’ll buy a less expensive home or a less expensive condominium. Good. I consider that desirable,” he said during the press conference. “So if it has that kind of a cooling effect that to me is a good thing.”
The new regulations will not take effect until July 9 therefore, investors and potential home buyers have some time to adjust to the market.
If you are interested in having the flexibility of lower monthly payments you should talk to us at your earliest convenience to get the details on how these new rules will impact your plans for buying a new home.
Higher Monthly Payments versus Lower Total Interest
The shorter amortization period definitely has its pros and cons and now is the time to see, which scenario fits your lifestyle the best.
Because of the shorter timeframe, homeowners will be forced to make higher monthly payments.
For example: a $300,000 mortgage spread over 30 years - with an interest rate of 4 per cent - would cost $1,426 a month. Because of the changes, that same mortgage amortized over 25 years increases the monthly payment by $152 to $1,578 a month. That is an increase of 10%.
However, the positive news is that the shorter amortization period means that homeowners will end up paying less interest. Taking our previous example, the total interest payments on a 30-year mortgage would total $213,558.91, but only $173,416.20 on the 25-year one.
Home buyers encouraged to take on less debt
Currently anyone who can’t afford a 20 per cent down payment is forced to get insurance through the CMHC, which means they will have to qualify under slightly stricter debt requirements.
Some of the other changes to the mortgage industry include:
Reducing the amount of equity homeowners can take out of their homes in a refinancing to 80 per cent from 85 per cent.
Capping cap the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent to qualify for CMHC insurance.
CMHC insurance is only available for mortgages under $1 million.
Many analysts including Frank Techar, head of personal and commercial banking at BMO have pointed out that the growth in the Canadian housing market is unsustainable and if the government didn’t start incorporating these new regulations, it could lead to a bubble scenario. I agree with these analysts and believe that Flaherty’s announcement will provide long-term stability in the Canadian housing market.
Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada's housing market experiences a stable growth.
Please feel free to conact me if you have any questions.
Have a great month and enjoy the warm weather.