Mortgage Rules
What do the changes really mean to you?
In my last newsletter I talked about the government rule changes taking effect March 18,2011. The new rules state that any high ratio mortgages (less than 20% down payment) will have a maximum amortization of 30 years. Also for refinancing the maximum would be 85% loan to value. All the banks followed suit with these rules for conventional applications (more than 20% down payment).
So, how does this effect you?
The change in amortization does two things. First, this means those qualifying at 35 year amortizations will now be able to qualify for a bit less money on a purchase or a refinance. The increase in monthly payment will be approximately $30 per month per $100,000 borrowed. However, the second point is really more important. This lower amortization means you pay much less interest over the life of your mortgage. The cost of extending amortizations is higher. This is one of the main reasons the government changed the rules - to allow consumers to lower their cost and duration of debt. I have always recommended to my clients that if they need the 35 year amortization to qualify for the mortgage they really should increase their monthly payments to bring the real amortization down below 30 years. Many of my clients have saved a lot of money with this approach.
In April 2010 the government imposed other rule changes regarding down payments on rental purchases and lowering the maximum refinance loan to value from 95% to 90%. Over the course of this past year we have seen those changes have little effect on the market. Lenders adapt to changes with their own guidelines and products. After all they are in business and need to continue to increase sales and profitability while staying within the government regulations. We are still seeing good activity in the rental investor market.
With the most recent rule changes we already see lenders adapting their debt servicing guidelines while others are still offering 35 year and even 40 year amortizations for buyers with more than 20% down. As always I recommend to my clients that we review their goals and then determine the best course of action to meet them. For those clients that can no longer qualify at a 35 year amortization to purchase it may mean looking at a home with a rental suite or having someone else on the mortgage - or it may mean waiting to buy with more money down - or looking at a different neighborhood.
For those refinancing I typically try to keep my clients to a maximum of 80% loan to value on their home so the lower rule to 85% is not a big deal for everyone. Again, it is about making informed decisions based on a common sense discussion. I wouldn't get too bent out of shape over the changes - in most cases there are options.
Cheers
Pauline
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