You’ve probably heard it: Ottawa is changing maximum mortgage amortization rates from 30 years to 25 years. Along with this change comes others, like a change in refinancing (Canadians can only withdraw 80% of their home’s value, instead of 85%) and capping the gross debt service (which looks at a consumer’s total debt payments as a percentage of their income) at 39 percent.
But what do these mortgage amortization changes mean for you, a new or current homeowner? We’re breaking it down (with the help of BMO mortgage expert Laura Parsons) to show you how you can still afford to buy a new home, and why you could actually save money in the process.
It’s Not as Scary as Everyone Thinks
BMO mortgage expert Laura Parsons shares, “BMO has had the 25 year amortization mortgage for two years, and so many clients like it. Only 40% of people were taking the 30 year mortgage, often just because it was there . It’s a personal decision, so sit down with an expert who can help you understand these changes.”
What’s Happening With Those Monthly Payments?
If you have a $300,000 mortgage, here’s how your monthly payments are going to work out (assuming a five year fixed rate of 3.29%).
Old Mortgage Amortization (30 Years): $1,308.53 a month
New Mortgage Amortization (25 Years):$1,464.75 a month
Difference: +$156.22 a month (less than $5 a day!)
While your monthly payments will go up, it’s still a manageable amount. Plus, you’ll see huge savings in your interest costs.
How Can These Changes Save Me Money?
Even though you may have higher monthly payments, you’ll pay less interest over the course of your mortgage. "The reductions to the maximum amortization period since 2008 would save a typical Canadian family with a $350,000 mortgage about $150,000 in borrowing costs over the life of that mortgage," said Finance Minister Jim Flaherty.
Interest on Old Mortgage Amortization (30 Years):$171,068.75
Interest on New Mortgage Amortization (25 Years): $139,423.87
Difference: - $31,644.87
With the new amortization rule in effect, you’ll save over $30,000 on interest alone!
Ask a Mortgage Expert – When Should I Buy a New Home?
These mortgage changes come into affect on July 9, 2012, and BMO mortgage expert Laura Parsons explains: “Any offers before July 9th can qualify for a 30 year amortization, just as long as you have a firm offer and a firm mortgage.” Homeowners don’t have to move in right away, but having a firm offer is key. Says Parsons, “If you’re just pre-approved with no offer before July 9th, you’ll receive the 25 year amortization.”
What If I Have Questions?