Say Goodbye to 40 year mortgages and 100% financing

July 10, 2008 · Filed Under First Time Buyers, Mortgages, Real Estate Articles and St. John's Real Estate · Comment 

The Canadian Government is making it tougher for home buyers to obtain a mortgage and with good reason.  Starting October 15 of this year, the new rules will take effect.

We are all familiar with the  sub-prime mortgage meltdown in the States the past year but while Canada is not even close to this disaster the government still feels it necessary to secure and maintain a strong mortgage and housing market.

The changes include:

  • Cutting the maximum amortization period to 35 years from 40.
  • Requiring a minimum down payment of five per cent, whereas loans for 100 per cent of the price are possible now.
  • Establishing a requirement for a consistent minimum credit score.
  • Introducing new loan-documentation standards.

The people effected are the purchasers with less the 20% downpayment for a property as they are the people that require mortgage insurance with the purchase of real estate.

Mortgage insurance protects lenders (ie Royal Bank, Scotia Bank etc) when a borrower  (the Purchaser) defaults on the loan if the sale of the property doesn’t cover the debt.

I for one am in agreement with this change.  The zero down, 40 year mortgage that was introduced a couple years ago allowed home buyers the ability to purchase a home yet become heavily in debt.  There was a lot of buyers that entered the real estate market in Canada during this time and probably shouldn’t have.

It will be interesting to see the public’s reaction to these changes.

Read the Globe and Mail Article – Ottawa tightens mortgage rules to avoid ‘bubble’

Read the CBC News release – Ottawa tightens mortgage insurance rules

Norm Fishers Saskatoon Blog Article – Canadian Government Says, “No More 40-year Mortgage for You!”

Edmonton Real Estate Blog – No More Zero Down, 40 Year Mortgages

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Homebuyers pay down mortgages faster

March 26, 2008 · Filed Under Mortgages · 1 Comment 

Canadians who have recently purchased real estate plan on paying off the mortgage as quickly as possible according to an annual mortgage consumer survey released Wednesday by Canada Mortgage and Housing Corp.

Seventy-eight per cent of respondents said they wanted to pay their mortgages off as fast as possible and one-third said they had made a lump-sum payment toward that end.

Eighty-four per cent of homeowners who are making weekly or biweekly payments on their mortgages are doing so at an accelerated rate in order help to shorten their amortization period, according to the mortgage insurer.

The fact that new homeowners are working to pay down principal early and are accelerating payments is a good indication that this responsible behavior will continue throughout the life of their mortgage.

More Canadians are becoming aware that, since mortgage interest is not tax-deductible in Canada, (as it is in the US), you are making mortgage payments of both principal and interest with money that you’ve already paid tax on “after tax dollars”. This makes it even more important to pay down your mortgage as soon as possible!

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If you have a variable mortgage thank the Bank of Canada today

March 4, 2008 · Filed Under Mortgages · Comment 

The Bank of Canada just cut the key interest rate by 50 basis points (or 1/2 percent) to 3.50%. Chances are throughout the week, those with a variable mortgage (currently at 5 per cent) will see this reflected at their respective banks. For those mortgage shopping, this can lead to a very attractive scenario. Based on a 25 year mortgage at $200,000, it can save you approximately $58 per month. Remember that the variable rate mortgage is not directly related to the fixed rate mortgage so you may not see the 4 and 5 year term mortgage rate drop by 50 basis points. Your personal loans and lines of credit will also be reduced by 50 basis points.

The reason: the Bank of Canada based the decision around its January projection for inflation which has shifted to the downside. They also noted clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected. With inflation measures already showing a sharp slowing – the core CPI inflation rate dropped to 1.4% in January from 2.5% last June – the Bank decided to act aggressively and trim the overnight rate by 50 basis points to offset the downside risks facing the economy.

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The dream of homeownership

February 26, 2008 · Filed Under First Time Buyers, Mortgages and St. John's Real Estate · Comment 

Why not put your rent money into an appreciating asset instead of in your landlord’s pocket?

Do you cringe every month when it’s time to write that monthly rent cheque? Like many other renters, you probably wish that your hard earned money was being put towards something that has potential payback but haven’t explored your options because you don’t think homeownership is within your reach. If you are currently renting you may be surprised to learn that there have been recent mortgage product innovations such as a minimal down payment (0%-5%) and extended amortization that can make owning your first home more than a pipe dream.

This is a great time to get into the St. John’s housing market. House prices are expected to appreciate by 12% in 2008 according to Remax. 2-apartment homes and condos are in demand but when it comes to first time buyers, many renters hesitate because they are concerned about two things. The first is that they may not have enough for a down payment. The second is that they are afraid that they may not be able to carry their monthly mortgage payments. Today, these concerns can be addressed with the minimal down payment and extended amortization options that are available to first time home buyers. Renters can now buy their first home with very little down and also not have to worry about high mortgage payments.

With minimal or zero down payment products, many financial institutions will provide you with 100% financing for the purchase price of the house. Some lenders may also let you borrow close to 100% in financing and offer you a small percentage back as cash. You are able to borrow 95% of the purchase price to put towards your down payment, closing costs, or other costs associated with purchasing a home. Do keep in mind that with minimal down payment you will most likely need to purchase insurance and also have to commit to a longer mortgage term.

Remember that if you do have money set aside for a down payment or have RRSPs you should still consider putting a larger down payment because this does lower your total mortgage amount and ultimately the amount you will pay in interest.

If on the other hand you are concerned that you will not be able to make your mortgage payments, then you should consider extended amortization products that lower your monthly payment amount. This is done by having the mortgage paid back over an extended period of time. Your monthly payments on a 35 or 40 year mortgage will be lower than the payments on a traditional 25 year mortgage.

You should note that with extended amortization products, you will be paying more interest over the long run but there are definite benefits to getting into a hot housing market early. Plus, you always have the option of decreasing your amortization period by exercising your prepayment options or by increasing monthly principal and interest payments.

A valuable resource for information on homeownership is the Canada Mortgages and Housing Corporation (CMHC) website. You will find publications such as Bringing Home Ownership Within Reach.

Given the availability of these new options and the resources to support tomorrow’s homeowners, it’s easy to see why many renters may be switching their rental payments to equity building mortgage payments within the next year.

Credit: www.newcanada.com

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Will the subprime mortgage effect St. John’s real estate?

January 28, 2008 · Filed Under Mortgages and Real Estate Articles · 1 Comment 

Last week both the United States and Canada dropped their interest rates, 0.75% and 0.25% respectively. With the recent subprime mortgage fiasco in the U.S, people have been asking was the rate reduction due to this? Will Canada follow the same fate? And most importantly….what exactly is a subprime mortgage?

Here is my interpretation of the subprime mortgage:

The Bank of Canada has it’s prime rate. Banks and lenders then offer a mortgage at competing rates to potential pre-approved home buyers.

A subprime mortgage refers to a mortgage offered to a borrower that is higher risk than the normal home buyer. They do not receive a lower interest rate. It’s actually the complete opposite. Potential home buyers who have poor credit scores make them candidates for a subprime mortgage and they typically pay much higher mortgage rates.

The problem was that the lenders offered an introductory rate which was comparable and at times lower than the prime mortgage rate to attract clients. You can begin to see the bigger picture forming.

The introductory rates were only temporary and after a year or two they expired and the interest rate on a subprime mortgage increases. This resulted in many, now home owners, who once had a low introductory mortgage rate paying interest rates in the double digits.

Remember, they were high risk from the start with “special” introductory offers. When the rates jumped to double digits, the subprime meltdown began.

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Mortgage Calculator: How Much Can You Afford?

January 3, 2008 · Filed Under Mortgages · 3 Comments 

How much of a house you can afford depends on a number of factors. The most important are your gross household income, your down payment and the mortgage interest rate. Lenders will also consider your assets and liabilities. Your own lifestyle and debt comfort zone also come into play.

This calculation is based on two simple rules that lenders use to determine how much of a mortgage you can afford. The first rule is that your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.

Secondly, your entire monthly debt load s hould not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments.

Feel free to use the mortgage calculator on our website for a quick calculation. For a more in depth assessment CanEquity will display an entire payment schedule for the life of a mortgage along with a summary of payments, interest, and balances within the mortgage term.

The average price in the current St. John’s Real Estate market for a single family home is about $150,000. Assuming a 5% ($7500) down payment. Interest rate of 5.79%

  • The amount you will need to mortgage is $146,418.75. This is amount has CMHC insurance fees included. The calculation is as follows: Purchase Price ($150,000) subtract Down Payment ($7,500) equals $142,500. To this amount we add a 2.75% insurance premium based on your Loan to Value (LTV) ratio of 95%. Therefore, 2.75% of $142,500 is $3,918.75 (cost of your insurance), plus $142,500 equals $146,418.75.
  • You will have 549 payments of $459.30 every 2 weeks for 21 years and 2 months, plus one final payment of $158.58 to payout a $146,418.75 loan with a rate of 5.79%.
  • Choosing biweekly accelerated payments will pay off your mortgage 46 months sooner, with a total of $23,264.48 in interest savings.
  • Mortgage balance remaining at end of term is $125,752.66.
  • By increasing your Down Payment you could lower your LTV ratio, therefore lowering your CMHC insurance premium of 2.75%.

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Arrange your Mortgage – Get Pre Approved

December 28, 2007 · Filed Under First Time Buyers and Mortgages · 2 Comments 

Buying your first home? Second? Looking for an investment property in the St. John’s Real Estate market? The first step in buying real estate is obtaining a pre-approved mortgage.

The St. John’s real estate market is booming! Having your pre-approval in place will certainly work in YOUR favor.

A pre-approved mortgage is a mortgage for a set maximum amount and interest rate that is arranged by a lender (ie bank) prior to the purchaser finding a house.

With a pre-approved mortgage you will:

  • Know how much you can afford and what your payments will be
  • Lock in your interest rate at today’s rate (or lower if rates drop), usually guaranteed for 90 – 120 days
  • Demonstrate that you are a serious buyer, which can help in your negotiations with sellers and their agents

The key to choosing a mortgage is to know your options. The more you know, the more likely you’ll save money now and in the future. There are numerous types of mortgage options available, fixed rate, open rate, variable rate – they can even blend 2 different types to sort your needs.Payments can be set up on a monthly, bi-monthly, bi-weekly and even weekly basis. As well, you get to choose the date of the month to make the payment. By changing from monthly to a bi-weekly payments, a typical 25 year mortgage can be reduced to 21 years. Thats a LOT of interest saved.

A great way to save on interest costs and reduce the life of your mortgage is by making annual principal payments. $2000 extra a year on a 25 year mortgage will reduced the amortization period to 15 years.

There are lots of mortgage calculators on the internet. Play around with them. Try different scenarios.

Jeff Burton with RBC is a great resource when it comes to mortgages. Speak with your mortgage specialist today and determine the right options for you.

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