Changes to mortgage rules aimed at making it easier to buy a home

Last week, the federal government announced significant changes to mortgage qualification rules.

The changes are an attempt to make it easier for buyers to get into the housing market.

So, what are the changes? In a nutshell, the key changes are:

• A 30-year amortization period for first-time home buyers (up from the current maximum 25-year amortization).

• A 30-year amortization period for any buyers of newly built homes, regardless of whether they are first-time buyers or not.

• The maximum purchase price for insured mortgages has been increased from $1million to $1.5 million.

The changes will come into effect Dec. 15.

What kind of a difference will these changes make? I ran a few different scenarios to see what kind of a difference the longer amortization period makes in dollars and cents. Using a mortgage amount of $500,000 and an interest rate of 4.25 %, monthly payments look like this:

• $2,698.30 monthly payment with a 25-year amortization

• $2,448.84 monthly payment with a 30-year amortization

So, the difference to a client’s monthly payment in this scenario is $249.46.

Using a purchase price of $500,000 with the minimum required down payment, family income needs to be approximately $112,000 to qualify for this mortgage with a 25-year amortization.If we extend the amortization to 30 years, family income required drops to about $105,000.

Looking at the math from a different perspective, I see how important this change can be for homebuyers. Using a family income of $112,000 and the minimum required down payment, the maximum purchase price using a 25-year amortization is $500,000.When we extend the amortization to 30 years, the purchase price increases to $535,000.

You might not think that a $35,000 price difference makes a big deal, but if you spend some time researching online, you can see exactly what the extra $35,000 means to the homes you are looking at.

The numbers I’ve used in these examples are approximate and intended to give you an idea of how these changes will affect homebuyers.

I do have a few concerns about pushing too far with qualification guidelines. It is all well and good to put clients into mortgages that are right at the top of their borrowing power but as we are seeing every day right now, there is significant risk to these clients when their mortgages come up for renewal if interest rates are significantly higher.

These changes were rolled out last week and lenders and default insurers are scrambling to get organized for when the changes take effect in December. It will be interesting to see the policies that are written to address the changes.

One question I have is, will lenders will charge an increased rate if clients opt for the new 30-year amortization? Another question is, will the insurers charge higher premiums for clients taking advantage of the longer amortizations?

I am also curious to see what is decided in terms of required down payment for homes priced between $1 million and $1.5 million.

Regardless, the announcement, combined with an environment where fixed rates seem to be dropping every day, has certainly generated a great deal of interest in mortgage pre-approvals as clients try to determine what they will qualify for once December rolls around.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.