My sole purpose of starting this blog is to help inform my clients on all things real estate. It's such a big investment. For many of us, it will be the biggest investments we make. Yeah...darn straight...that is scary!
Sometimes, when we don't understand something we are a little leery about asking questions because we fear looking stupid. Remember I told you in my opening blog that one of the things that are important to me is making sure my clients feel comfortable working with me. So, with that in mind, this is what I invite you all to do. If there is something you don't understand or you need clarification on all I ask is that you scroll down to the bottom of the post, click on comment and simply ask me. And here's the great thing about that...you don't have to leave your name. Yep, you can remain anonymous but still ask your question and better yet get your question answered. In fact, if there is anything in the real estate world that you don't understand but would like to, please ask me that too and I can create a post that addresses it.
Psssst....lean in...I'm going to let you in on a big secret......(in shushed lowered tones)... you're not the only one that doesn't know.
Okay, so over the last few days, you've no doubt heard all about the changes the government has made to the mortgage rules. In a nutshell, mortgage amortization periods will be reduced to 30 years from 35 years and this goes into effect on March 18, 2001.
Why the change?
The Federal government is taking steps to crack down on runaway consumer borrowing. Our interest rates have been so low that Canadians have increased their debt load significantly. The government wants to improve the financial situation of Canadian households by lessening their opportunity to increase their debt. They are concerned that some Canadians are getting stretched and would feel the pinch when interest rate do eventually rise....and they will rise.
What is "amortization"?
Simply put, it's just how long it will take you to pay off your house in full. The longer the amortization, the lower your payments will be because they are spread out further. But keep in mind, the shorter your amortization means you pay your house off faster and you save money in the long run. Most first-time home buyers are not too concerned with that. Just getting into the real estate market is hurdle enough and the most important numbers to most first-time buyers are "how much is it going to cost me per month."
What does that mean to all the first-time home buyers out there?
Well, since most first-time buyers have less than 20% to put down on their first home, they would require a government-backed mortgage (CHMC). These new mortgage rules affect all CHMC mortgages. Now, take for example that you have a $200,000 mortgage. At 30 years ammortization (with an interest rate of 4%) your monthly payments would be $70.00 more than if you ammortized over 35 years and for many buyers that diffference could decide if they can or cannot afford a home.
So what are my choices?
If you were ready to buy now, I'd suggest buying before the changes go in effect (not to mention you would also get in front of the 7% forecasted increase in property values this year) or you simply stay put and continue saving your money until you can comfortably afford your house...being house-poor shouldn't be taken lightly as it's no way to live your life.
And that folks, is why the government made the changes in the first place.
I'm here for YOU.
I'm here for YOU.
~Ciao
Very informative!
ReplyDeleteBut wouldn't it be far better to amortize over a less time so my house is paid off quicker and I save tons of money on interest charges?
Good question and the answer is absolutely.
ReplyDeleteOn paper that is the best plan...and then there is reality. For some people, and especially first time buyers, they are hit with all the expenses of moving into their first home. That little bit left in your pocket each month can certainly come in handy.
Here's some food for thought. Most banks will let you choose and set up an automatic monthly payment that is more (not less) than the amortized monthly payment, with the extra amount going directly off the principle but if there ever was a job loss or any kind of bump in the road for you, you just let your bank know that you need to reduce the payment back to the original set amount. So, I'd say it's like keeping an escape route handy if you ever need it. The other thing is when your term comes up (1,3 maybe 5 years) you can decrease the amortization then and/or put as much savings as you would like against the principle amount of the mortgage.
A lower amortization can sometimes at least get you into the housing market. It doesn't mean you actually have to wait 35 years to have your house paid off.