Starting March 18th, the maximum allowable amortization period on new mortgages will be reduced to 30 years from 35 years. This change is effective on ‘high-ratio mortgages’, or mortgages with down payments of less than 20%.
Shorter amortization periods reduce the total interest paid over the life of a mortgage, but increase mortgage holders’ monthly payments. For example, let us consider a $300,000 home with a 5-year fixed mortgage rate of 3.79%. Using RateHub’s mortgage payment calculator and assuming the minimum down payment of 5%, you can see the monthly mortgage payment would increase by around $100 by reducing the amortization period to 30 years from 35.
Of course, there is a way to get around the new amortization standard. If you have a 20% down payment or more, also known as a ‘conventional mortgage’, you may be able to access a longer amortization period. Merix Financial, for instance, offers a 40-year amortization, and it is expected most of the major banks will continue to offer 35-year amortizations on conventional mortgages.
These new mortgage regulations are being introduced to curb concerns over high Canadian debt levels, which reached 150% of personal disposable income per average Canadian household at the beginning of 2011. This does not necessarily mean Canada is at the verge of a US-style housing collapse nor does it have an alarming mortgage default rate – which is less than 1% – but rather Canadians are borrowing as much as possible. This is worrisome in low interest rate environments, as significant mortgage rate increases can be crippling. Finance Minister Jim Flaherty hopes the new regulations will encourage Canadians to save more.