As I discussed in one of my earlier blogs the new rules governing mortgages in Canada come into affect April 19,2010. These new mortgage rules could affect many first time buyers in that it will be harder to qualify for that first mortgage. The new mortgage rules force borrowers to qualify for a five year fixed term rate. At the present time many borrowers are qualifying based on the variable rate mortgage which is as low as 1.85% in some areas.

This past week all five major banks raised their five year fixed term rates to 5.85%.

However, one question that has been out there since the new mortgage rules were announced, was how the five year term would be calculated in qualifying a borrower. If the banks used the posted rate of 5.85% it would be much tougher to qualify for your new mortgage . If the banks on the other hand used the used the actual rate consumers get , which in some cases is as low as 3.75% it would be a lot easier to qualify.

Ottawa has made no comment on what interest rates should actually be used.

An internal document recently distributed by CMHC to mortgage brokers shows consumers will be able to use their  actual rate to qualify for a mortgage if they go for the five year term or longer. So even if buyers want the variable rate they must qualify for the higher five year benchmark rate. This unfortunately may force some first time buyers into the longer term rate as they can not qualify for the variable rate because of the higher qualifications.

This may sound onerous but I think in the long run it may save some borrowers some problems down the line. If you qualify for the higher posted rate and are making payments on the higher rate but are actually paying the lower variable rate your principal will be reduced much faster. Mortgages are notoriously bad for the amount of interest you pay in the beginning. Very little actually goes toward the principal., however if your payments are higher and the interest is lower the difference comes right off your principal.

For example: if you had a $400,000.00 mortgage amortized over 35 years based on the posted rate of 5.85% you monthly payments would be approx.$2229.00 per month. Over the first five years you would pay $22,040.00 off the principal and pay $111,743 in interest and your balance after five years would be $377,9560. However, if you paid the same per month $2229,00 but the interest rate was 3.75% ( the payments on 3.75% would normally be $1706 per month.) you would pay off $31,563 in principal, pay $70,813 in interest and have a balance of $368,436. The best part is, if you continued this practice of paying higher payments than required by your actual interest rate,  you would have this mortgage paid off in 11.86 years not 35. BIG difference for an extra $523 per month.

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This is a fairly large and sometimes unexpected cost for unsuspecting buyers. This tax is calculated by the Lawyer or Notary Public who is doing your conveyancing and is considered part of the closing costs.The Land Transfer Tax is a Provincial tax the government levies on all residential Real Estate transactions in B.C. The tax is 1% of the first $200,000.00 of the value of the Real Estate transaction and 2% of the remainder above $200,000.00. For example if you  purchased a home for $525,000.00 the Land Transfer Tax would be 1 % of the first $200,000.00 or $2000.00 and 2% of the remainder which is $325,000.00 or $6,500.00. The total tax being $8,500.00. As you can see this can come as a big shock to first times buyers who have budgeted to the limit and didn’t expect an extra $6,500.00 to be tacked onto their closing costs.

Fortunately there are exceptions to the tax but they are somewhat complicated and better suited for a phone conversation or a discussion over a Starbucks coffee. If you would like more information give me a call on my cell at 604 897 4798.

Thanks for reading

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I have received some calls from clients worried about how the new mortgage rules coming in on April 19 will affect them.

First let me explain what the changes are. The rule changes only affect government backed insured loans.

Under the new rules, buyers will have to qualify for a 5 year loan, which is at a higher interest rate than a shorter variable or shorter fixed term loan even if they don’t want the longer term. Being that it is at a higher interest rate the qualifications are more difficult to meet. ie your income, credit rating etc will have to be higher.

So the bottom line is if you “just” qualify now for a short term variable rate mortgage you better find a new home before April 19 or you just might not qualify any more.

The best thing to do is check with your financial institution now and see how the rule changes affect you.

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Since my last posting I’ve received some calls asking me for examples of the math for calculating if it’s a good idea to refinance. Here is a recent example of one I did for a client.

Outstanding mortgage is $244,000 @ 4.9 % amortized over 40 years. Over the 5 year term of the loan the buyer would have paid $1155.72 per month and after 5 years would have paid $12,079 off the principal and paid $57,264.37 in interest. They were advised by the bank the penalty would be $13,000.00.

At first glance it is a no brainer it’s not worth it right! Wrong, if the client remortgaged at 3.65% over 40 years. The would pay $964.37 a month payments on the loan and  paid $15,490.20 off the principal paid $42,372.36 interest or $14,892.01 less in interest minus the $13,000 penalty you still save $1,892.01.

Now if you kept your payment the same at the new rate, you would really save money. First you would reduce your payment period (amortization) by TWELVE  years to 28 years. You would pay $41,272 (or $2,992 less than the original even with the penalty) in interest and $28,141 off your principal in the first 5 years.

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I get a lot of calls from clients wondering if they should refinance their homes at the new lower interest rates. They look at the penalty and just assume it is not worth it, but thats’ not always true. The quick answer is “it depends”.

I know it sounds like a cop-out but the truth is it does depend on the individuals situation. The best way to find out is sit down and do the math. You have to calculate how much the penalty is and how much it will cost you in actual dollars to re-finance. this  may be a lot but don’t stop here. Now calculate how much you will save over the term of your new financing deal at the new interest rate. You may be surprised at the savings.

If this all seems like a lot, give me a call and I will help you calculate the numbers.

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