BIG BANKING CHANGE

The Federal government has quietly changed the Banking Act with respect to mortgage lending. This is a huge change that was relatively unnoticed by the media.

For over 40 years the Bank Act required that buyers with less than 25% cash down had to have an insured mortgage. This meant that most young buyers paid an additional fee of between 1%and 3.75% depending on amount borrowed to insure the lender against loss should the buyer later default on the loan.

In the last few years the government has repeatedly made it easier to buy homes. The rates charged for insurance have gone down, the length of time to repay the loan has gone up and the minimum downpayment required has dropped from 10% to 5% and even to 0% in some cases.

This latest change means that instead of at least 25% you can put just 20% downpayment and still avoid the need for mortgage insurance. For buyers in this bracket it means a saving of 1% of the amount borrowed.

It is interesting that the government continues to promote home ownership by making it easier to get a mortgage. With house prices rising, these changes are allowing the younger buyer to at least get some partial advantage within the market by lowering costs to buy and lowering the monthly payment.

In 1997 a purchase of $300,000 with 5% downpayment created the following:

$15,000 down; CMHC fee $10,687.50; payments of $1,980.58 for 25 yrs.

In 2007 a purchase of $300,000 with a 5% downpayment creates the following:

$15,000 down; CMHC fee $ 7,837.50; payments of $1,542.06 for 35 yrs.

Of course what you buy today for $300,000 is a townhouse whereas 10 years ago that would have bought you most of the typical Brookswood houses.

The point is that it’s easier to borrow money, the fees are reduced and you can borrow more for longer. Whether this is a good thing in the long term is yet to be seen.

If you’re thinking of making a purchase in the next while, call me and we can get together and discuss all the benefits and cautions about buying in today’s market.