The government recently announced upcoming changes to CMHC insured mortgages (generally speaking mortgages with less than 20% downpayment or equity in a home). Amortization period will shorten from 35yrs to 30yrs , the most you can refinance your home mortgage will be reduced from 90% to 85% (these take effect March 18/11). They are also getting out of the insured home line of credit business (as of April 18/11) which will mean the maximum line of credit you will be able to get will be 80% of the value of your home.

So why are they doing this and how will this effect us?

The government is worried about the increase in personal debt of Canadians and they should be. By lowering the amortization period from 35 to 30yrs may slightly increase the monthly payments of mortgage holders, but in the long run it will help home owners save money, earn equity sooner in their home and pay their mortgage debt off earlier.

An example of someone paying off a $100,000 mortgage at say 5% pays total interest payments of approximately - $110,500  35yrs , $92,000  30yrs, and $74,500  over 25yrs.

For many years the maximum amortization you could get was 25yrs. Due to increased house prices, the government extended that up to 40yrs. They then reduced it to 35yrs and now back to 30yrs. It is still 5yrs longer than many people are use to having and it becomes a forced saving of equity for those who max out on amortization. This is not to say the extra time and lower payments are not needed by some buyers, but the government became worried that it also allowed people to go deeper in debt, with little in the way of equity. Many people who extended themselves, based on the affordability of lower payments and the belief the market will always be positive.

CMHC charges an insurance premium for mortgages over 80% of the value of the home. But did you also know they charge extra for any amortization over 25yrs?

It just makes sense to me that as buyers we should set a budget that we can afford and focus on ways that we can pay our mortgage off sooner. In the long run we will save money and increase our security in our home by increasing our equity ownership.

The impact of the amortization change in the short term may lead to increased activity in the price ranges where Buyers may be in need of the extended period to make the purchase affordable, but after that I think buyers will just adjust their sites (the result being an approx 6% lower mortgage amount they will qualify for at 30 vs 35yrs) and realize that this is a good thing and it will help them grow their investment faster over the long haul.

If you have any questions on how these changes may impact you or your buying decisions, send me an email or give me a call, I'd be glad to try and answer your questions. Thanks.

Michael Wilson