Friday, June 22, 2012

How Mortgage Changes Affect Payments

Mortgages Amortized Over 25 Years 
Mean Higher Monthly Payments

The recently announced changes to the mortgage business in Canada will very likely have the effect of disqualifying future home buyers, because the monthly payments rise, as the amortization period reduces.

The amortization period refers to the number of years it will take at the current interest rates to completely pay for your home. Hence, a 30 year amortization period means you will be paying the lender for 5 more years than if the mortgage was written on a 25 year amortization.

$300,000 Mortgage Costs $141.71 More Per Month

Using the RBC online mortgage payment calculator it shows that a $300,000.00 mortgage on a 5 tear term at the fixed posted rate of 5.25% will require $141.71 more by way of monthly payment to meet the terms of a 25 year amortization as opposed a 30 year period.

The cost to service a $300,000.00 mortgage repaying principle and interest only (this does not include taxes) over a 30 year period is $1644.32 and over a 25 year period rises to $1786.03 for a total monthly increase of $141.71.

Remember when banks determine your ability to service a debt and thereby qualify for a mortgage, it could mean that over the 30 year term you may qualify, but over the 25 year term you may not. These changes take effect July 9, 2012.

 The Word Mortgage Means Death Pledge

The Word Mortgage means Death Pledge (just some trivia). Which for many in today's society could be interpreted to mean we will be making mortgage payments until we are dead. It is said the number of Canadians facing retirement are also still carrying a mortgage on their home.

In Canada today, rather than seeing a house as something to own outright, providing the security of having a place to live, many Canadians have seen their homes as cash registers and have re-mortgaged their homes based on rising market value. So, rather than looking forward to living mortgage free, many will be looking at carrying mortgages until they die.

This will also have the effect of eroding the value of your estate, thus reducing the real value that you will be able to pass along to your children.


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