Business

D. Smith: What mortgage qualification rule changes may mean for you

The rules to qualify for a mortgage for a home you want to buy or build have changed.

The rule changes, which took effect July 9, will include reducing the maximum amortization for government-insured mortgages to 25 years from 30 years.

The amortization period is the length of time it takes to pay off a mortgage.

This change forces borrowers to pay back their debts sooner, and will reduce the amount of interest paid over the life of a mortgage.

Mortgage payments may be larger as more debt gets paid with each payment.

Lenders can only issue home equity loans up to a maximum of 80 per cent of the property’s value—reduced from 85 per cent.

Anyone wanting to buy a home worth more than $1 million must now have a down payment of at least $200,000; this change will not affect the majority of Canadians.

The maximum gross debt service ratio  is fixed at 39 per cent and total debt service ratio is fixed at 44 per cent.

The recent changes are designed to lower debt, promote savings and make consumers more conscious of their personal debt levels.

The new rules are suppose to help pay off mortgages faster, make it tougher to borrow money and slow the housing market—which is considered a “bubble” by some economists.

The changes were made in an attempt to keep consumer spending in check.

The changes may mean that consumers may have to wait longer to purchase a home, or may need to consider a smaller home.

Purchasing a home with a suite to rent supplementing your monthly mortgage payments will pay off your mortgage years ahead of schedule and it can also allow you to purchase a home otherwise unaffordable.

Interest rates are still at a historical low point. Interest rates will rise in the future resulting in higher interest rates charged on mortgages and consumer loans.

How much house can you afford? As a starting point to find out if you can afford to purchase your first home, or to purchase a more expensive home, prepare a budget summary and track your household finances.

A balance sheet will summarize the income in and all the expenses back out in your own household.

The net amount left over is hopefully positive, resulting in an additional amount of positive cash flow each month.

When your cash flow is positive, you are in a better position to borrow and repay an increased debt level.

A mortgage broker will shop from multiple lenders to get you the best deal for your mortgage.

After you get your mortgage set up with a mortgage broker, use a life insurance broker to get the best deal for your mortgage / life insurance needs.

A mortgage broker may offer you mortgage insurance that pays them an additional commission, but you will get a better deal and save money with a life insurance broker.

The real estate industry will wait for the impact of the new mortgage rules on their industry.

There could be a reduction in home prices and a slow down on house sales.

A reduction in home prices combined with low interest rates can be a positive time to purchase or refinance a home.

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