Alison's Money Rule

New mortgage rules

Posted November 28, 2011
Originally Published February 23, 2010

Homeowners and buyers shouldn't worry about new rules making mortgages harder to get. Job one is protecting yourself against rising interest rates.

Run, run for your life! Straight to the bank. Quick, get that mortgage pre-approval. Dash to the nearest real estate office. Buy. Buy. Buy. Get into the housing market while the getting is good -- and possible.

Whoa! Wait just one minute.

Last week Federal Finance Minister, Jim Flaherty put the squeeze on prospective homebuyers with new rules designed to let some air out of the real estate market. Of course, making it more difficult to qualify for a mortgage could cause a mini-stampede between now and April 19 when the rules come into effect.

After that date mortgage applicants have to meet the standards of a 5-year fixed rate mortgage, even if they are applying for a lower variable rate. That means, on a $250,000 mortgage, you must qualify for roughly $250 more in monthly payments.

Nonetheless, don’t rush off in a panic to buy before April 19. Instead armor yourself against the biggest threat to homeowners and buyers -- rising interest rates.

Here’s how to do it:

1. Aim for a downpayment of 20 per cent or more. You won’t have to pay for mortgage insurance saving at least $5,000 on a $250,000 mortgage. You’ll also have a smaller balance exposed to future higher rates.
2. Go for as short an amortization as possible. Twenty-five years was the standard until 2006. Now 35 years is commonplace. The additional ten years decreases your monthly payments by $200 on a $250,000 mortgage. But it increases your total interest payments by a whopping $91,000 over the life of the mortgage. The longer amortization period also makes you more vulnerable to interest rate increases.
3. Plan to make lump sum payments or select a bi-weekly schedule and reach the mortgage free day much sooner.
4. Get rid of non-essential credit such as retail credit cards you may have applied for in order to get a price reduction or make a buy-now-pay-later purchase. And reduce or eliminate line of credit limits. This will improve your credit score making it easier to qualify under the new rules.

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