This week started with quite the surprise announcement by the Federal Government as it was announced that they were making the 'boldest reforms in decades' regarding Canada's mortgage system. The announcement of the two major changes was definitely surprising to everyone as it was not expected, and seemed to come out of nowhere.

The first announcement was that first time home buyers could now qualify for 30 year amortization on an insured mortgage whether they were buying a new build home or a resale property. This is a change from previously allowing only 25 year amortization on insured mortgages, while amending another change that came into effect August 1st that allowed first time home buyers to qualify for a 30 year amortization as long as they were buying a new build home.

As a reminder, an insured mortgage is when a home buyer has less than 20% to put down on a property and features a mortgage default insurance premium in order to be backed by the insurer and decrease risk to the lender.

The change to allowing 30 year amortization can accomplish two things; I will give examples shortly. The first is that it can lower monthly payments to allow first time home buyers to better afford their new property while getting used to home ownership. The increased cash flow can assist home buyers with this; however, the lower payment is offset by the fact that their will be an increased interest cost to the mortgage and less principal will be paid off during the term, resulting in a higher mortgage amount at the end of it. The second thing that the increased amortization can do is increase the amount that the potential home buyers would qualify for and be potentially be able to compete for a wider range of properties that they otherwise would not have had access to; however, a budget should be considered ahead of using the program for this purpose in order not to end up house broke.

To give an example of the lower payment potential that a 30 year amortization would represent, we will use a mortgage amount of $500,000 at todays average insured rates on a 5 year fixed mortgage. The mortgage payment using 25 year amortization would be roughly $2,800 compared to the mortgage payment of roughly $2,550 using 30 year amortization. This represents a difference of $250 per month and can help make the mortgage more affordable; however, as mentioned before, the downfall to this is that there is roughly an increase of $2,000 in interest expense and there will be roughly $16,000 less going towards principal over the term of the mortgage. This means that at the end of the term, the mortgage balance at renewal will be roughly $16,000 higher than it would have been if the 25 year amortization was used. There will likely be an increased mortgage default insurance premium to consider with the longer amortization; details on this will follow as the insurers have time to prepare for the upcoming changes.

It is important that clients consider the downfalls of using a longer amortization period and take advantage of prepayment options available to them when possible in order to ensure their mortgage is properly positioned for them in the future.

It is important to note that the 30 year amortization announcement is for first time home buyers buying a new build or resale property, as well as anybody purchasing a new build property, whether a first time home buyer or not.

The next example is in regards to how the longer amortization period can affect how much clients would qualify for; which means they may have the opportunity to find a property that is suitable for them that may not have been an option with the current 25 year amortization. If we use annual income of $120,000 with a down payment of $40,000 and 25 year amortization we would come up a maximum purchase price in the range of $530,000; however, if we increase the amortization period to 30 years, the maximum purchase price could potentially increase into the neighborhood of $565,000. While this can present the opportunity of having more options available and being able to compete a bit more, it does come with the same downfalls of increased interest expense and less principal being paid over the term. It also may present the downfall of clients potentially buying more home than they can afford and struggling to make mortgage payments along with other household expenses.

Before using the 30 year amortization as a way to increase purchase potential, the suitability of the program for the clients should be weighed heavily and all negative aspects should be considered. Just because you may be able to use the increased amortization to buy more house; doesn;t always mean you should. 

The other announcement was an even bigger surprise and represented a bigger change than anyone in or out of the industry expected. Many in the mortgage industry have been advocating for an increase in the cap to purchase prices in order to have an insured mortgage. Currently the maximum purchase price is $1,000,000 and is sufficient in most parts of the country; however, there has been a push to increase the maximum purchase price to $1,250,000. The federal government surprised everybody and announced that the cap for an insured mortgage was being increased to $1,500,000, which is the first change to this since 2012.

While this change will assist some home buyers with being able to enter the market with a lower down payment in the more expensive parts of the country, it's use may be limited as the amount of income required to qualify for such a large mortgage is out of range for most people. This may lead to an increase in co-signers being used; however, changes to tax rules regarding co-signing need to be considered first.

A mortgage over a million dollars with 30 year amortization for a first time home buyer can definitely present some big challenges, and affordability of the home buyers themselves needs to be carefully considered, even if there are co-signers willing to assist with the purchase.

The changes are proposed to take effect on December 15th of 2024 and before looking to take advantage of these programs, it is important to discuss the pros and cons with a Mortgage Broker beforehand.

So, you've come across these terms - variable rate mortgage and adjustable rate mortgage, and you're curious to know what exactly sets them apart. Well, let's dive right in and explore the differences between these two commonly used terms in the world of mortgages. When talking about mortgages, the interest rate is a crucial element to consider. It determines the amount of interest you'll pay on your mortgage and affects your monthly payments. Both variable rate mortgages and adjustable rate mortgages have interest rates that can change over time based on the lender's prime rate, but there are some key distinctions between the two. A variable rate mortgage (also known as a static payment variable mortgage) is a mortgage where even as the interest rate changes, your payment remains the same. What does change is how your payment is allocated between principal and interest. As interest rates rise, more of your payment will go towards interest with less towards principal; and vice versa when rates come down. The payment on a variable rate mortgage may need to change if interest rates go too high and the payment isn’t enough to cover any principal at all; which can result in a mortgage that grows instead of reduces. Lenders will commonly contact clients to advise them of options in order to not let this happen; some lenders will even automatically adjust the payment as well to ensure there is always a little bit of principal being paid down. On the other hand, an adjustable rate mortgage is a mortgage where the payment fluctuates in lockstep with interest rate changes. When interest rates go up, so too does your payment; although, when rates come down, your payment does as well. This type of mortgage ensures that your amortization remains the same and you are always paying down principal even when rates are going up. There can be some pain and decreased cash flow when rates are going up; however, a decrease in rates will result in some breathing room due to an increase in cash flow. The frequency of rate adjustments on a variable or adjustable rate mortgage can vary; many lenders typically adjust the rate in the next month following the rate adjustment; while others will adjust it right away. If you have a variable or adjustable rate mortgage, it is important to know when your lender makes their change so you are well prepared. Most lenders adjust their prime rate based on the Bank Of Canada’s policy interest rate, which has the potential to be adjusted as many as 8 times a year; it is recommended to know when these meetings are; the next one is April 10th, 2024. When deciding between a variable rate mortgage and an adjustable rate mortgage, there are a few factors to consider. Firstly, think about your financial situation and how comfortable you are with potential changes in your monthly payments. If you're on a tight budget and prefer a more predictable payment structure, a fixed-rate mortgage may be a better fit. On the other hand, if you have some flexibility and are prepared for potential rate adjustments, a variable rate or adjustable rate mortgage could be worth considering. If you are prepared for some risk and still want the certainty of a fixed payment then a variable rate mortgage may be the most suitable option; however, it is important to understand the risks of that fixed payment. Remember, choosing the right mortgage type is a significant financial decision that should be based on your unique circumstances and goals. Consulting with a knowledgeable mortgage professional can provide insight and guidance to help you make an informed choice. Feel free to reach out at any time to discuss your options as well as your current situation to make sure it is the right fit for you and your family. In conclusion, the key difference between a variable rate mortgage and an adjustable rate mortgage lies in their payment adjustment mechanisms. With a variable rate mortgage you will have some payment certainty; but, this payment may not cover any principal versus an adjustable rate mortgage where you will always be paying down principal; however, may be in for a bit of a ride if rates adjust. Understanding these differences and carefully evaluating your financial situation and market conditions can help you choose the right mortgage option for you and your family.