Canadian Finance Ministry has tightened the rules for government-backed mortgages four times

Since 2008, the Canadian Finance Ministry has tightened the rules for government-backed mortgages four times. The most recent changes, in July 2012, hurt first-time home buyers the most, because it made it tougher for them to qualify for a mortgage.

The maximum amortization period for insured mortgages is now 25 years, down from 30 years. In 2011, 40 per cent of new mortgages were amortized over periods longer than 25 years, says the Canadian Association of Accredited Mortgage Professionals. One-quarter of all mortgages had amortization periods longer than 25 years.

An RBC report says that based on a typical mortgage size of $288,000 for a bungalow, with a posted mortgage rate of 5.24 per cent, the reduction in the amortization period from 30 years to 25 years raises a homeowner’s monthly mortgage bill by $136. The Ministry of Finance says that raises the monthly mortgage payments from nine per cent to 12.5 per cent, depending on interest rate assumptions.

The government, concerned about high levels of consumer debt, instituted the changes to slow down the real estate market and it seems to have worked. But the improving financial health of the country won’t be much comfort for would-be first-time buyers who thought they were close to being able to afford a home of their own, but now have to wait.

A recent survey by TD Canada Trust says that recent first-time buyers were able to save up for a down payment fairly quickly. A down payment of five per cent (the minimum required) took less than two years for 71 per cent of those polled. A down payment of 10 per cent to 20 per cent was achieved in one to four years by 66 per cent of those surveyed, and 61 per cent were able to save up for a down payment of 25 per cent in three years or less.

However, the poll found that 29 per cent of first-timers failed to budget for some of the additional costs of home ownership, such as maintenance fees and utilities. Thirteen per cent didn’t plan for closing costs (typically about 1.5 per cent of the purchase price of the home), and six per cent didn’t budget for anything except for the down payment and mortgage payments.

If you are thinking of buying a home, first you have to “prove to yourself that you are ready to take on the responsibility of a mortgage,” says Farhaneh Haque, director of mortgage advice for TD Canada Trust. “Start by comparing what it costs you to rent monthly to what it would cost if you owned your home. Remember, as a homeowner there are housing expenses such as property tax, insurance, repairs and utilities that should be factored in, in addition to your monthly mortgage payments.”

The Financial Consumer Agency of Canada (FCAC) website includes online worksheets to help first-time homeowners save up for a house. Most people know how much money they make, says FCAC, but do you know where your money is going? The exercise of filling out the worksheet can help you figure out where your money is going and suggest ways to cut expenses.

“Learning to stick to a budget can seem difficult at first, but the more you use your budget, the easier it becomes,” says FCAC. “If you find your actual spending varies a lot from your budget, you will have to re-adjust the figures in your budget to make it more realistic. If your spending varies only a little from your budget, you are on the right track.”

Once you think you have a large enough down payment to think about buying a home, most major Canadian banks have worksheets on their websites to help calculate what your can afford. Check out affordability calculator.

RBC says a common first-time buyer mistake when looking for a mortgage is focusing too much on the interest rate, rather than the type of mortgage they are buying. Over the last several years, variable-rate mortgages have proven to be money savers, but if you are worried that rates may go up, a fixed rate provides peace of mind. Most banks also offer a combined fixed and variable-rate mortgage option.

As demonstrated by the difference between the monthly payments in 25 and 30-year amortization periods, you can save a lot of money by having a shorter amortization – but that requires a larger down payment. Another way to reduce total interest costs is to increase the frequency of payments when you can afford it. Make sure your mortgage allows you to do this and to use prepayment privileges without penalty. It’s a competitive mortgage market, with banks, credit unions and mortgage brokers all interested in securing your business, so shop around for the best rates and terms.

Getting pre-approved for a mortgage is a great idea because then you will know exactly how much you can afford, and in a hot real estate market you can make an offer immediately if you find the house of your dreams.

First-time buyers can also take advantage of the Home Buyers’ Plan, which allows you to withdraw up to $25,000 from your registered retirement savings plan to buy or build a home.

Written by Jim Adair

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