Posted by:Aleksandra Oleksak
Today I have a guest post lined up! Alexandre Duval will be discussing why buying a property in Canada will be harder starting today. Just in case you missed what’s scheduled to happen today, the mortgage rules will be changing once again, if you missed my post and 2 cents about it, no worries, just click here for the full post.
In the meantime, here’s the scoop…..
According to Statistics Canada, the ratio of household debt to personal disposable income has moved from 66% in 1980 to just over 150% in 2011. Much of this overwhelming debt – about two-thirds of it – is generally due to mortgages. In an effort to slow down this scary trend, the Harper government recently announced a series of changes to the rules that oversee the Canadian housing market. These modifications, despite the good intentions underlying them, could nevertheless end up limiting access to property.
The Amortization Period Will Be Shorter
Of all the new measures that will come into effect on July 9 of this year, the reduction of the maximum amortization period – that is, the number of years over which the reimbursement of a mortgage is spread out – from 30 to 25 years is probably the one that will jeopardize access to property the most.
On the one hand, this change will certainly help households save considerable amounts of money in the long run by limiting their total interest payments by as much as $45,000 for a $350,000 mortgage, according to the Department of Finance. On the other hand, it will increase monthly payments a great deal, and that is where the shoe pinches.
For instance, a family who was planning on spreading its $300,000 property payments over a period of 30 years (at an interest rate of 4%) would have paid $1,426 per month for three decades. With the five-year reduction of the maximum amortization period, however, the same family will have to pay $1,578 per month for 25 years.
Uneven Effects May Appear Across the Country
An increase of $152 per month, as in the example above, may seem within the financial means of many. Unfortunately, the housing market is far from homogeneous in Canada, and the 25-year rule may affect citizens unevenly across the country.
Imagine you are a member of a middle-class family that is seeking to buy a property. If you are looking at Montreal condos for sale, you may find that most of them will still be affordable after the 25-year amortization period comes into effect. The monthly payment difference may not have such a huge impact on your budget. But if a given property “only” costs $300,000 in Montreal, it may well cost near the double in Ontario’s capital.
In effect, if your family is downtown Toronto, you could find that is it impossible for you to meet the expense of the monthly payment difference between a 30- and a 25-year mortgage. In this particular sense, some Canadians who are currently planning on buying a property may have a harder time than others doing it, despite the new rule’s glittering promise that they ultimately will save tens of thousands of dollars in interest payments.
About the author:
Alexandre Duval is a blogger for District Griffin. He is also currently completing his master’s degree in political science at the University of Quebec in Montreal.
Will the new rules affect your mortgage or home buying decision? Would love to hear from you!