Amortization and affordability.

Zoltan PadarFirst Mortgages, News, Uncategorized

Homebuying rules

The odds of being able to purchase a home in Canada is, for many Canadians, starting to feel like the odds of winning the lottery. And like the lottery, if they don’t try, they will never know whether they will qualify.

Obviously, there are many factors that lenders will consider when trying to determine if a potential borrower will qualify for a loan: LTV % (loan to value), credit score, the amount of the loan, the amount of the down payment and the length of time within which the borrower would like to pay down their mortgage (AKA the amortization period).

 Depending upon the type of lender and the actual lender, some of these factors will be more or less important. YouYou will definitely find that the amortization period will have a direct impact on the amount of the monthly payment and the amount of interest paid over the life of the loan. Typical amortization period are between 20 and 30 years in length with 25 years being the most popular (but it can be as short as 10 years).

High Ratio Mortgage vs. Low Ratio Mortgage

Borrowers with a down payment equal to 20% of the purchase price or less, their mortgage would be considered high ratio, and they will likely have purchase mortgage default insurance. But if your borrowers have a down payment of more than 20% of the purchase price, they will have a low-ratio mortgages), and they will qualify to be able to select a longer amortization period.

 How Much Longer?

As mentioned above, a 25-year amortization period would be typical for most Canadian borrowers. Importantly, there are other options for borrowers of low ratio mortgages with the longest amortization period being a 35-year period. Notably, prior to 2008, Canadians had the option of a 40-year amortization period.

 Advantages of a 35-Year Mortgage is the Amount of the Monthly Payment

Reduction in the monthly payment – e.g. Comparing a $750K mortgage with a 25-year vs. 35-year amortization period with an interest rate of 2%: Monthly payment for a 25-year period = $3,179 vs. 35-year = $2,485 – a difference of $694/monthly.

 Greatest Negatives to the 35-Year Mortgage is the Amount of Interest Paid

While the amount of the monthly payment is reduced by almost 22%, the amount of interest paid over the life of the mortgage loan will be much higher with a 35-year amortization period – e.g. Comparing a $750K mortgage with a 25-year vs. 35-year amortization period with an interest rate of 2%: Total amount of interest paid for a 25-year period = $203,672 vs. 35-year = $293,478 – a difference of $90,000 (approx.).

An added challenge for borrowers that qualify for the extended amortization period AND who see the advantage of reducing their monthly payments to improve affordability is, that at the present time, very few traditional “A” lenders like banks and credit unions offer 35-year amortization periods.

The good news for borrowers that don’t qualify for A or Alt mortgage loans for their second property is there is a tremendous availability of other lending options today in part because of the large number of alternative lenders – credit unions, MICs and private lenders – where the stress test doesn’t apply.

 And while it might mean paying more in interest for their mortgage loan, for those borrowers that are determined to own a second property, it might just be the best alternative to get the mortgage loan that they need. Even if it’s a short-term solution before moving upstream to a different lender.

Would More Borrowers Qualify for Mortgages?

If the goal in Canada is to find ways to allow more borrowers to qualify for mortgage loans, wouldn’t the longer amortization period help them to more easily qualify? Of course, they would have to qualify for a low ratio mortgage but if they did, let’s remember that they aren’t stuck with a 35-year amortization period forever – if they can renew their mortgage and are in a place where financially they can now afford a short amortization period, borrowers are within their right to obtain the shorter period. However, of course, when borrower gets into better financial state, can afford higher monthly mortgage payment. MortgagePRO Ltd. can help to find a new first mortgage, with a lower amortization period. Though payments higher, but will pay less in interest, more paying down the principal of the mortgage.

 The reality is that here in Canada, you will have to work harder to find a lender that offers a longer amortization period.

 Would the longer amortization period help any of your borrowers to get a mortgage loan and purchase the home they desire? Let’s find out here!

If you have more question and or would like to discuss your situation, please call Zoltan at 403-253-2022 or email him [email protected] you will be glad, you did.