Tougher mortgage rules take effect Friday

By Sunny Freeman | Mar 2011

Stephanie Bilbija, a university student and single mom, will have to save for a few more years before she’s a home owner, thanks to new mortgage rules that may force some Canadians to think twice about whether they’re ready to jump into the market.

The new rules as of Friday will make the maximum payback period 30 years — resulting in somewhat higher regular payments than with the 35-year amortization that has been the choice of about 30 per cent of home buyers.

Bilbija, 25, says she wants to own a home with enough space for her daughter to play, but she also needs to have money for other expenses.

“I would rather have the option of having a longer time to pay, if it meant I could get a house and still have cash flow as a single parent,” says the York University student, who has a part-time job and part of a down payment saved.

Some first-time buyers like Bilbija will have to make sacrifices to achieve their dream of home ownership now that the option of a 35-year repayment period is being eliminated.

Bilbija says she’ll save up more for a down payment and wait a few years to buy in an area just outside the pricey Greater Toronto Area.

The rule changes will increase the monthly payment on a $300,000 mortgage at four per cent interest by $105 — but will also reduce total interest paid by $42,288 over the life of a mortgage because it’s repaid five years sooner.

Dropping the amortization to 30 years will cut buyers’ maximum possible purchase price by six to seven per cent. That means someone who qualifies for a $300,000 mortgage could afford a home that’s about $18,000 $21,000 less expensive.

“When you reduce amortization, it increases your mortgage payment for the same purchase price, so if you have people near the edge of affordability, forcing them into a shorter amortization means they won’t qualify for as much house,” says Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.

“It means that you’ll have to find a cheaper house or you’ll have to move a little further out of the city.”

McLister says first-time owners should re-examine their monthly cash flow before deciding whether now is the time to enter the market.

“You don’t want to get in a situation where you have no breathing room.”

Mortgage holders’ total debt service ratio should be under 40 per cent of income and if they can’t comfortably buy a house and keep their debt ratios under that number, it’s probably wise to wait and save up more, he says.

McLister warns that the new rules won’t necessarily keep everyone out of trouble, so first-time buyers should avoid the tendency to buy the most expensive house their mortgage allows.

He adds that renting could be a better option for potential first-time buyers in some of the most expensive markets because much of the initial mortgage payments end up paying for interest rather than debt reduction.

But if buyers are absolutely set on securing a 35-year amortization period, McLister advises them to see a mortgage planner immediately so a mortgage approval goes through before March 17.

Pre-approval won’t do either; you have to have a firm purchase agreement, or the new rules will apply.

On a positive note, he adds that the new rules could save first-time buyers even more money because they put limits on some on those willing to max their mortgages out to secure a home and drive prices up in the process.

“If you start putting limits on those people now, those people at the edge, it’s going to put pressure on prices,” he says.

“Home prices are driven by affordability, they’re driven a lot by first time buyers and these limits will rein in some of those people.”

Vancouver-area real estate agent Richard Morrison, says “irrational exuberance” in advance of the changes has driven an increase in sales, but adds that usually clients asking for a 35-year plan are in the minority.

He welcomes the long-term effects of the changes, despite a potential short-term lull in business, but says they could help to further stabilize the market.

“If we had kept it with five per cent down and 35-year amortization, you’re taking buyers from the future into the present and could have disastrous effects,” Morrison says.

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