What has changed for home buyers with 30 years Mortgage Amortization?

It seems that that the home buyers in Calgary have now got used to the new mortgage rules which were implemented almost 2 months ago now. A lot of home buyers and sellers are still wondering how the new mortgage guidelines have affected them. Out of the 3 changes, one which probably has affected the first time home buyers the most is the change in mortgage amortization to 30 years from 35 years. Buyers always wonder how much their monthly instalment will go up because of the reduced amortization . The second question which gets raised by some of the buyers is whether they’ll now qualify for a mortgage to buy the home they had been waiting to buy. Let me try to answer both of these questions.

Let’s say that you want to buy a house for $350,000, with a 5% down payment. This would mean that you’ll need a mortgage of $332,500(excluding the CMHC/GE insurance fee).

With the 35 year amortization, your monthly payment @4% fixed rate, would have been $1,179, whereas with 30 year amortization, the monthly payment will be $1,307. To simplify it further, for every additional $10,000 in mortgage amount the increase in payment has been $3.50 at 4% interest rate.

It’ll be interesting to see how this has potentially affected the home buyers for their mortgage qualification. For mortgage qualification, lenders use GDSR(Gross debt service ratio) & TDSR (Total debt service ratio), which basically defines how much maximum mortgage you can obtain.

GDS is calculated by dividing total housing costs by the gross family income, where total housing costs include mortgage payment, heating cost, property tax & 50% of the condo fee.

TDS is calculated by adding any other monthly debt like car loan payment or credit card payment into the housing cost and then dividing it by the gross family income.

The standard mortgage guidelines from most major banks for high ratio (insured) mortgages dictate that your GDS and TDS ratio can’t be more than 35% and 42% respectively.

Using the same figure of $350,000 for the price of a home, let’s do some reverse calculation now.

Let’s assume that the monthly heating cost is $100 and the property taxes for the single family home which you’re buying are $150/month.

In case 1, with 35 years amortization, the total housing cost comes out to be $1,429. Therefore for 35% GDS, the monthly income had to be $1429/0.35, which comes out to be $4,083 ($48,995 annual)

In case 2, with 30 years amortization, the total housing cost is $1,557. So at 35% GDS, the monthly income has to be $1557/0.35, which is $4,449 ($53,383)

This calculation assumes that the other debt obligations including loan & credit card etc. don’t exceed 7% of the income account so that TDSR does not go out of the limit of 42%.

So from this scenario, it is obvious that with everything else being equal, a home buyer now needs an additional income of about $4,400 to buy a home valued at $350,000. The other option for a home buyer will be to either increase the down payment or to buy a less expensive home to keep his debt service ratio in line with the stipulation.

For majority of Calgary home buyers, the increased income requirement or a slight increase in mortgage payment might not be a deterrent, but it’s always prudent to discuss your financial situation with your Realtor & Mortgage Agent ahead of time.