BUYING AGAIN?
Here’s What’s Changed Since the Last Time!
Depending on when you last locked into a mortgage or got pre-approved for a maximum purchase price, a lot may have changed. The changes aren’t necessarily bad. In fact, the changes have been implemented to ensure stability in our market and to prevent a Canadian version of the U.S. housing crash, where borrowers started to default en masse when their low teaser rates expired and they were unable to afford the higher mortgage payments.
That being said, here’s a quick recap of some of the major changes over the last 6 years:
1. QUALIFYING FOR VARIABLE RATES OR FIXED TERMS UNDER 5 YEARS:
As of April 19, 2010, in order to obtain a variable rate or a 1 to 4 year fixed mortgage, you need to qualify at the posted 5 year Benchmark Rate (currently 4.64%). This change was made to ensure that you can afford any future increases in rate if the Prime Rate increases or once your shorter than 5 year fixed rate mortgage comes up for renewal.
EXAMPLE:
Assuming a mortgage of $350,000 amortized over 25 years at current rates with 5% down payment:
· 5 year variable rate @ 2.35% = $1,542/month;
· 2 year fixed rate = 2.24% = Payments of $1,523/month;
· Benchmark Qualifying Rate = 4.64% = Payments of $1,964/month; and
· 5 year fixed rate = 2.79% = Payments of $1,619/month
To qualify for a variable or a fixed interest rate term that is less than 5 years, you must be able to debt service monthly payments of $1,964.49 even if your monthly payments are less than the 5 year fixed rate payment of $1,618.88.
In other words, with excellent credit, instead of needing a minimum household annual income of $61,000 to qualify for a 5 year fixed rate mortgage, you will need a minimum household annual income of $72,500 to qualify for a variable rate or 1 to 4 year fixed rate mortgage.
2. NO MORE INTEREST ONLY PAYMENTS ON CREDIT:
When calculating your debt coverage we now have to use 3% even if your actually payment is interest only, 3% of your outstanding balance is used. AND with the majority of Lenders, this INCLUDES any student loans that may not yet be in repayment (if they show up on your bureau, that is).
So that $15,000 unsecured LOC with $75/month interest only payments? Now we need to calculate that debt in at $450/month. For a typical borrower with a yearly income of $50,000, at an interest rate of 2.79%, purchasing with 5% down, that decreases the purchase price you qualify for by about $55,000!
3. AMORTIZATION REDUCED:
The maximum amortization allowed for insured mortgages has moved around a bit but is now down to 25 years from the previously allowed maximum of up to 40 years. Shortening the lifetime of your loan increases monthly mortgage payments thereby decreasing the maximum mortgage for which you can qualify.
4. BUSINESS FOR SELF (STATED INCOME) MORTGAGES:
Stated income has been impacted more than any other mortgage product. Lenders used to allow self-employed individuals to state a reasonable income instead of the total income reported on their tax return. These policies recognized that many write down their income or hold income in their companies instead of drawing it to avoid higher taxes. We’ll cover this change in more detail in our next newsletter, but there is significantly more documentation now required for those who are self-employed.
WHAT DOES THIS ALL MEAN?
Tightening mortgage qualification rules make mortgage planning and thorough pre-approvals even more important. If you’ve purchased in the past, your purchasing power may have changed significantly. With stricter Lender policies, having access to a variety of different Lenders through a broker also becomes more important. You may not fit one Lender’s policies, but can be approved under another Lender’s guidelines. Long before you go shopping, contact a mortgage professional to determine your options.
Pre-approvals are not just for first time home buyers. If you are considering another purchase contact me early to determine your options.
Hope to hear from you soon!
Minn Coates, Mortgage Advisor
VERICO Mortgage Tailors
PH: 780-863-0700
minn@mortgagetailors.com
www.minnsmortgages.com
