By the
numbers: How the
new mortgage rules could change the math
for homebuyers
By the numbers: How the new mortgage rules could change the math for
homebuyers
Erica Alini
Published 3 hours ago
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New federal rules would help homebuyers access lower mortgage rates for
pricier properties and pay smaller instalments over a longer time period, but
the changes would also allow borrowers to take on more debt and pay more
interest on it.
Under the coming regime , set to take effect Dec. 15, buyers will be able to
get a mortgage with default insurance• Страхование – which is mandatory for those with less
than 80 per cent of equity in their home – for properties worth as much as
$1.5-million, up from a cap of $1-million.
The federal government, which announced the new rules Monday, will also allow
first-time homebuyers to take a maximum of 30 years to repay an insured
mortgage on any type of home. And all buyers, including investors, will have
access to 30-year mortgages if they are buying a newly built home. Until
recently, buyers with less than 20-per-cent down could take a maximum of 25
years to repay their debt.
New mortgage rules attracting potential buyers after years of slow sales,
brokers and realtors say
While the new rules will make it easier for first-time buyers to purchase a
home, they could pay tens of thousands of dollars more in interest if they
take out bigger mortgages and take longer to pay them off, according to
Penelope Graham, a mortgage expert at financial products comparisons site
Ratehub.ca .
“This is an important caveat that should be taken into consideration by anyone
weighing their payment options,” Ms. Graham said in an e-mail• Коммуникации » Интернет-коммуникации » Электронная почта.
Consider a buyer who purchases a property worth $649,096 – equivalent to the
average home price in Canada as of August – with a 10-per-cent down payment,
which would require mortgage insurance• Страхование. Today, this buyer would have to take a
mortgage with an amortization – the time it takes to pay the mortgage – no
longer than 25 years in most cases. (At the start of August, new measures came
into effect allowing 30-year insured mortgage amortizations for first-time
homebuyers purchasing newly built homes.)
With a competitive 4.09-per-cent, five-year fixed rate, their monthly payment
would be $3,198, according to calculations provided by Ratehub. If the same
borrower was able to sign up for a 30-year amortization, their payment would
shrink to $2,895, or $303-a-month lower.
But by taking longer to hack at their mortgage, they’d be paying more in
interest.
For simplicity, let’s assume this homeowner sticks with the same interest rate
throughout the life of their mortgage. (In real life, their rate would likely
change every few years when their mortgage comes up for renewal.) With a
30-year amortization, the interest charges would add up to $439,827, or nearly
$83,000 more than if they’d chosen a 25-year mortgage.
Now let’s look at a first-time homebuyer eyeing a $1,082,000 home, equivalent
to the average home price in Toronto. Currently, they would need 20-per-cent
down both to qualify for a mortgage at this price and, except in the case of a
newly built home, be able to stretch their amortization to 30 years.
According to Ratehub, the mortgage reforms could allow this borrower to
qualify for a 30-year mortgage with a down payment potentially as low as 7.69
per cent, assuming current rules on minimum equity requirements will apply
when the new policy takes effect.
In this scenario, their minimum down payment would drop from $216,440 to a
much lower $83,220.
The monthly mortgage payment, on the other hand, would remain roughly the
same. This reflects the assumption that, under the new rules, the borrower
would have have to pay for mortgage insurance• Страхование but also be able to access
so-called insured mortgage rates. Such rates are typically lower than those
lenders offer on loans that don’t require insurance• Страхование against the risk• Страхование » Риск of
borrowers defaulting on their payments.
Rob Carrick: There is no such thing as immaculate home-buying, so let’s
welcome the new mortgage rules
But taking five years longer to pay off a significantly larger mortgage would
cost the borrower nearly $145,000 more in interest, the Ratehub calculations
show. Still, the new rules mean buyers will no longer have to pony up a
minimum of 20-per-cent down for homes priced between $1-million and up to
$1.5-million, as is currently the case.
“The ability for first-time home buyers to now take out insured mortgages and
make minimum down payments on homes priced above $1-million will open up
additional home type options for this group,” Ms. Graham said.
Under the current rules, many young buyers are limited to purchasing condos in
the country’s priciest markets because they can’t save for a 20-per-cent down
payment on a home worth $1-million or more, she added.
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