While enjoying the sunshine at my local public pool on the weekend, I read up on the Government of Canada’s newly tightened mortgage lending rules.
For the average Canadian home buyer, the change in the amortization period — how long it takes to pay off the mortgage — from 30 years to 25 years could translate into $300 of reduced cash flow each month.
That’s equal to a couple’s grocery bill or a family’s annual school supplies. Over the course of a year that adds up to $3,600 — a family vacation, RRSP contribution or college tuition. But, consider that $300 in reduced cash flow an opportunity to build equity, not money for your one-night party in Whistler.
The reason for the change to the lending rules is to cool down Canada’s hot real estate market by reducing the borrowing capacity of homebuyers, who in recent months have been warned about the perils of soaring debt levels — a product of lax lending policies.
Though the new rules make it harder to borrow larger sums of money, they promote frugal living, which translates into less stress and a stronger bottom line. A shorter amortization period will save Canadians boatloads of interest. It also forces buyers to think twice about purchasing a home that is too pricey.
The drawbacks associated with the new rules are that for existing homeowners with 30 to 40-year amortization periods, switching lenders or refinancing will be tough because they’ll have to re-qualify under the new rules. Simply renewing with your existing lender shouldn’t be an issue.
If you’re in the home-buying market, don’t get bummed out that you can’t borrow as much. Consider it an opportunity to save more of a down payment, look for a less expensive home and negotiate harder on price.
For existing homeowners, these rules should act as additional motivation to build more equity and not accumulate additional debt.
Accelerated weekly or bi-weekly payments allow borrowers to make one to two extra payments annually and most mortgages allow you to prepay up to 20 per cent of the original amount. Accelerating payments in any form can significantly reduce total interest paid.