The federal government recently made four changes to mortgage lending rules which will show up in different segments of the housing market. The changes were made to help ensure households do not overextend themselves on property financing, and in anticipation that interest rates must, at some time in not-too-distant future, rise.
The amount consumers may borrow without mortgage insurance was reduced from 85 per cent to 80 per cent of the purchase price. Buyers with a deposit of 20 per cent of the purchase price or less will require the added expense of mortgage insurance for the protection it provides for the lender. This change will have the greatest effect on first-time buyers and those who are in the move-up market and have not accumulated much equity in their current home. It will have no effect on those buyers who have a deposit of more than 20 per cent of the purchase price to apply to their purchase.
The second change is the reduction in the maximum mortgage amortization period from 30 years to 25 years. This really is a return to the rules which existed until 2006. Reducing the length of the amortization period will have the effect of lowering the total borrowing costs for consumers. It has been estimated the shorter amortization period will add about $0.50 per thousand dollars of mortgage principal to the monthly payment. As an example, if someone borrowed $150,000 and had to repay the mortgage in 25 years instead of 30, the monthly payment would be about $75 more per month but would cut off five years of repayment of principal and interest.
Another change affects the higher-end housing market: mortgage insurance is no longer available for mortgages on houses with a purchase price in excess of $1 Million. What this does is bring the mortgage insurance business back to what it was originally intended for – first time buyers and working families.
The last change will apply to homeowners who arrange refinancing loans against the value of their homes. The government has reduced the amount from 85 per cent of the value to 80 per cent.
How will these changes affect home buyers in the REALTORS® Association of Hamilton-Burlington (RAHB) market area? The most likely effect may be lowered expectations on the part of home buyers. First time buyers in particular may be looking at down-sizing their dreams about the style or size of their first home purchase because borrowing rules have become a little stricter.
The good news is our market is generally stable and our housing stock is considered affordable, especially when compared to other cities in our province. The average freehold house price in the “old city” of Hamilton is around $245,000. That means there are homes available for well under that amount, as well as above. A quick look on REALTOR.ca reveals there are freehold properties available for under $100,000 and many for under $200,000.
Other centres – Stoney Creek, Glanbrook, Grimsby, Caledonia, Dunnville, to name a few – are similarly affordable.
Another factor that reduces the effects of the changes is that interest rates are still at historic lows. First-time buyers may look at short-term variable rates to get in on the lowest rates, or may lock in to a longer-term fixed-rate mortgage to ensure their payments remain affordable while their income goes up and their home’s value increases.
Home ownership has proven to be a good investment in our area, and there is nothing in the changes to the mortgage rules that would change that.
Cameron Nolan
President, 2012