By Farhaneh Haque, Regional Director – TD Canada Trust
Since 2008, there have been a number of tightening measure in Canadian Lending Rules, and amidst talks of further lending changes. So, what could the possible 30 year amortization change entail? It could mean:
Elimination of the 30-year amortization altogether;
Allowing a 30-year amortization where borrowers qualify fully on a 25-year amortization; or
Limiting the 30-year amortization to borrowers meeting certain qualifying criteria. For example, higher credit scores, larger down payments or lower debt ratio limits.
While there is no clear direction on what is proposed, or whether this will move forward, let’s turn our attention on what potential home buyers should consider as they prepare for home ownership.
A shortened amortization of 25 years (from 30 years) will impact potential buyers’ affordability in the same way as roughly a 0.75% increase in mortgage interest rates. Let’s compare:
From a qualifying lens; when qualifying for a mortgage, the monthly mortgage payment, in large part, determines the purchase price that the homebuyer may qualify for. Since the amortization period contributes to the monthly payment calculation, a shortened amortization translates to an approximate 7% decrease in a potential buyer’s buying capacity.
Consider that owning a home means payments in addition to monthly mortgage payments – property tax, home insurance, utilities etc. – reigning in the borrower capacity through the shortened amortization, especially for first time buyers, may make homeownership debt more manageable and may also require new buyers to be more realistic about their borrowing capacity.
To learn more contact your local TD Mobile Mortgage Specialist.