The Canadian government has introduced a new policy allowing first-time buyers of newly built homes to choose a 30-year amortization period. This change is designed to make homeownership more accessible. Here’s a detailed look at what this new policy involves and how it might benefit you.
What is Amortization?
Amortization refers to the period over which you repay a mortgage. Traditionally, insured mortgages in Canada had a maximum amortization period of 25 years. The new policy extends this period to 30 years, which can result in lower monthly payments for buyers.
Why is This Change Important?
The Canadian housing market has faced significant challenges, including high home prices and strict mortgage regulations. These factors have made it difficult for many Canadians and residents to purchase a home. By extending the amortization period, the government aims to ease these financial pressures and make homeownership more attainable.
Key Details of the New Policy
- Eligibility: The 30-year amortization option is available to first-time buyers purchasing newly built homes. To qualify as a first-time buyer, you must meet at least one of the following criteria:
- You have never bought a home before.
- You have not lived in a property that you or your spouse owned in the past four years.
- You have recently ended a marriage or common-law relationship.
- Property Requirements: The property being purchased must be newly constructed and should not have been previously occupied for residential purposes. However, this requirement does not exclude newly built condominiums that may have had an interim occupancy period.
- Applicability to High-Ratio Mortgages: Additionally, this measure is applicable only to high-ratio mortgages, where the loan amount exceeds 80% of the home’s purchase price, and it is limited to owner-occupied properties.
- Insurance Requirements: This policy applies to insured mortgages, meaning buyers need to obtain mortgage insurance.
Comparison: 25-Year vs. 30-Year Amortizations
To illustrate the impact of this change, let’s consider a $500,000 mortgage with an interest rate of 4.90%:
25-Year Amortization:
- Mortgage Amount: $500,000
- Monthly Payment: Approximately $2,879
30-Year Amortization:
- Mortgage Amount: $500,000
- Monthly Payment: Approximately $2,638
With the 30-year option, the monthly payment is about $241 less, translating to an annual savings of around $2892.
Benefits of the New Policy
- Improved Accessibility: Lower monthly payments make it easier to enter the housing market, making homeownership more affordable.
- Increased Purchasing Power: Reduced monthly payments may allow you to qualify for larger loans, helping you buy a home that better fits your needs.
- Financial Flexibility: With lower mortgage payments, you can allocate funds to other financial goals, such as savings or investments.
Considerations
- Longer Repayment Period: A 30-year amortization means a longer financial commitment. Consider your long-term financial goals before choosing this option.
- Higher Total Interest Costs: Although monthly payments are lower, the total interest paid over the life of the mortgage will be higher.
- Market Conditions: Interest rates can fluctuate, so stay informed about market conditions and consider locking in favorable rates.
- Insurance Premiums: Don’t forget to factor in mortgage insurance premiums into your budget. Additionally, some insurers may add a surcharge to the insurance premium, and in Ontario, there’s also a tax on this surcharge, which can increase closing costs.
The introduction of 30-year amortizations for insured mortgages represents a significant step toward improving housing affordability in Canada. By lowering monthly payments and providing greater financial flexibility, this policy can help more Canadians and residents achieve their homeownership goals.
For more information and personalized advice, feel free to contact me.
Karla Badillo – Sherwood Mortgage Group Brokerage 12176