If you're buying a home, you should find it easier than ever to get a mortgage.
While the U.S. mortgage market is troubled, Canada's mortgage market is still healthy, competitive and innovative.
Several changes introduced last year make it easier for buyers with a good credit record to move into their dream homes more quickly.
But don't take all the financing you're offered just because you qualify for it. Some mortgage products are too expensive and benefit lenders more than borrowers.
You can now pay off your mortgage over 30 to 40 years, instead of up to 25 years as before.
This allows you to reduce your monthly payments or buy a bigger house for the same monthly payment.
"A surprising number of existing homeowners are looking at this as an opportunity to purchase `more house' while leaving their monthly payments unchanged," says mortgage broker Elisseos Iriotakis, a principal with Safebridge Financial Group.
Extending the mortgage amortization to 30 to 40 years doesn't mean locking in an interest rate for that long. You can get a fixed rate for up to 10 years – though most borrowers opt for five – after which you must renew the mortgage. This means negotiating with your current lender or switching to a new one.
You can now get a conventional mortgage by putting down 20 per cent of the purchase price.
Until last year, you needed a 25 per cent down payment to avoid a "high-ratio mortgage," one that was insured against default by the Canada Mortgage and Housing Corp. or Genworth Financial Canada.
Mortgage default insurance protects the lender from losses in case the loan is not repaid.
If you have a down payment of 20 per cent or less, you must pay an insurance premium ranging from 1.75 per cent to 3.1 per cent of the loan value. This premium is usually added to the total mortgage amount and spread over the same repayment period.
Those with low down payments can get a mortgage without default insurance from some non-bank lenders. However, they pay a much higher interest rate and extra administrative fees.
Mortgage insurance is no longer dominated by two players, CMHC and Genworth.
AIG United Guaranty, a subsidiary of New York-based American International Group Inc., made a splash when it came into Canada's mortgage insurance market last year. AIG offers new options, such as a product for buyers who can put down only 3 per cent of the purchase price. The payments can be spread over 30 to 40 years.
Cash-strapped borrowers once needed a 5 per cent down payment to get the same flexibility.
Though insured "no money down" mortgages are also available, they require a higher credit score and higher fees.
AIG's 3-per-cent-down mortgage insurance product is attractive to people buying in Toronto, says mortgage broker Ann Pope-Todd of Assured Mortgage Services.
"Because the city imposed a new land transfer tax ... many people don't have a 5 per cent down payment," she says.
You can now qualify for a low-down-payment mortgage if you're self-employed or work on commissions. CMHC has introduced self-employed simplified insurance, which allows you to buy a home with as little as 5 per cent down. And you don't have to hand over your tax returns for the last few years to qualify.
"A self-employed person used to need a down payment of 15 per cent to 25 per cent to get a conventional mortgage from a bank," says Bill Nugent, a broker with Mortgage Intelligence in Newmarket.
Self-employed simplified insurance is available for mortgages with a payback period of up to 40 years.
You can now qualify for a mortgage if your total debt load is more than 40 per cent.
When looking at whether you can afford to buy a house, lenders look at the gross debt service (GDS) ratio. Monthly housing costs, including mortgage, property taxes and heating, shouldn't exceed 32 per cent of gross household income.
They also look at the total debt service (TDS) ratio, which takes into account debts such as bank loans, car loans and credit card balances.
If your total debt load exceeded 40 per cent of your monthly gross income, you used to be turned down when applying for a conventional mortgage.
Today, many lenders will give you one if your total debt load is 42 per cent of household income. Some go up to 44 per cent.
"The thing that gets missed is that these are maximums," says John Schipper, president of Mortgage Intelligence Inc.
He believes lenders should require borrowers to do a monthly budget for a realistic view of their income and expenses.
Schipper is also concerned about the longer payback periods.
"My daughter is 23 and wants to buy a condo. I'd suggest a 40-year mortgage. I see a place for them if they're effectively managed," he says.
"But they can be used by unscrupulous lenders or brokers. Say, offered to 50-year-olds."
When you stretch out the mortgage payments for so many years, your total costs are much higher.
Suppose you buy a $375,000 house, put down $75,000 and take out a $300,000 mortgage at 5.99 per cent (the lowest current five-year rate).
You'll pay almost $784,000 with a 40-year mortgage, compared with $575,000 on a 25-year mortgage (assuming the rate stays the same).
That's more than $200,000 in extra costs – and for what?
By extending the payback period, you'll save only $285 in your monthly payments.
You could get the same bang for the buck – about $9 a day – by bringing your own lunch to work or taking public transit instead of your car.
Will Dunning, a housing economist in Toronto, believes Canadians "borrow conservatively, especially for homes," and there's no danger yet of Canada heading down the same road as the U.S.
source:http://www.thestar.com/columnists/article/292254
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