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.

This entry was posted on Sunday, April 4th, 2010 at 4:30 pm and is filed under Keith Macdonald's Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.