30 Year Amortization Mortgage

What Is The Mortgage Qualifying Rate (MQR)?

The mortgage qualifying rate is used to qualify all variable mortgages and fixed mortgages of 1-4 year term. The Bank of Canada updates the mortgage qualifying rate (MQR) every Monday at 12:01am.  5 year fixed or longer fixed terms qualify using the contract rate (the actual borrowing rate).  Here is an explanation:

Mortgage Qualifying Rate Example

Assumptions

  • Household income: $100,000
  • Assume 20% downpayment
  • Freehold home, no condo fees
  • 5 year fixed mortgage 3.19% amortized over 30 years
  • 5 year variable mortgage at prime - 0.5% amortized over 30 years
  • Mortgage qualifying rate (MQR): 4.99%

Maximum fixed mortgage: $577,000 (Purchase price: $721,250) Maximum variable mortgage: $466,000 (Purchase price: $582,500)

One way to increase the purchase power of a variable or fixed mortgage is obtain a 35 year amortized mortgage. Once the homeowner takes possession of the home, they can set the payment at the 30 year amortization level to avoid paying additional interest over the life of the mortgage.

To find out what you qualify for and a have a winning strategy for bidding wars, please contact Nawar.

Is Toronto's Real Estate Affordable?

Sold over asking, bidding war, multiple offers, over asking....These expressions are synonymous with Toronto's real estate.  The latest RBC affordability index report came out in November 2013 which shows eroding affordability in the city:

  • Bungalows: 55.6%
  • 2 Storey: 63.7%
  • Condos: 33.8%

What do these numbers mean?  The affordability index is based on 25% downpayment at 5 year fixed mortgage rate amortized over 25 years.  The percentages mean the following: To buy a bungalow, 55.6% of one's pre-tax income is required to cover the mortgage, property tax and utility costs.  Assuming homeowner's tax bracket is 40%, this leaves 4.6% (100%-55.6%-40%) to cover the costs of food, transportation, entertainment, emergency and any child care costs.  Clearly in Toronto, 2 incomes are required to afford detached and bungalow homes.  On the other hand, condos continue to be affordable.  Single income homeowner (100%-33.8%-40%) would have 26.2% of their income to cover living costs.  This is one reason why the condo market continues to be stable in Toronto.

How To Get Into Toronto's Hot Real Estate Market

Yes, there is hope and options to get into the market.  Here are some to consider:

30 & 35 Year Amortization Mortgages

For conventional mortgages (20% or more downpayment), 30 & 35 year amortization mortgages are available.  Lower monthly payments would make the home more affordable, however planning for renewing into a higher interest rate environment is important.  An extended amortization mortgage backed by the inflation hedge mortgage strategy is a sound financial approach.

Basement Rental Suite

Renting the basement has its pros and cons. Offsetting homeownership costs is a benefit and makes the home more affordable, however some aren't comfortable with someone living in the same house due to noise concerns and/or loss of space. Basement rental income can range from $750-$1400 depending on location and condition.

Legalizing Basement Rental Apartments

Buying A Home? Buy A Duplex

Combining both options is a possibility for frustrated homebuyers who are tired of losing bidding wars.  To discuss your mortgage options and strategies, please contact Nawar.

Home Buyers Videos Guide - Nawar Naji Toronto Mortgage Broker

Why 30 Year Amortization Mortgages Are Good

I know, this is against what I stand for: achieving mortgage freedom and building long term wealth, but let me explain why 30 year amortization mortgages are good.  The exception is for home buyers putting less than 20% downpayment, the maximum allowed amortization is 25 years per government requirements.

Why 30 Year Amortization Mortgages?

Lately, I have been coming across clients where certain events have dictated changes in their housing situation:

  • A couple where one spouse has gone back to school to upgrade their skills. The are down to one income for a few years. Having 30 year amortization mortgage instead of 25 year amortization mortgage makes a difference in their cash flow requirements.
  • A first time home buyer who wants to move up the home ownership ladder by renting their existing home instead of selling. Having a 30 year amortization mortgage would improve the cash flow on the income property (current home) which helps in qualifying for the next home.
  • A couple where one spouse has lost their job and have young children. This is another case of a 30 year amortization mortgage would make a big difference for cash flow purposes.
  • A homeowner who bought a home with 25 year amortization mortgage is looking to move prior to mortgage maturity. To save client penalty money, my recommendation was to port mortgage and increase mortgage amount. However since original mortgage is amortized over 25 years, they qualify for a lower amount than they desire.
  • Real estate investors who got financing through institutions that required investment properties to be amortized over 25 years are having issues acquiring further properties since 25 year amortization mortgages result in lower net cash flow.

With today's low interest rates, porting a mortgage and doing and increase & blend will be more popular in the future. It doesn't make sense to break a mortgage at 2.99% in 3 years from now.  Having a 30 year amortization mortgage provides the qualification flexibility for future moves.

Mortgage Freedom

I have arranged mortgages for clients who wanted to amortize their mortgage over 10 years. So how can a 30 year mortgage be paid off in less than 10 years? Mortgages, typically, come with 20% pre-payment privileges. If the homeowners utilize this privilege they can be mortgage free in less than 5 years by applying the 20% pre-payment privilege every year.  Here is an example:

Mortgage Amount: $400,000 Mortgage Interest Rate: 2.99% Annual Pre-Payment: $100,000 Mortgage paid off in 4 years

I realize the above example is extreme, where very few homeowners can pre-pay $100,000 annually of after tax dollars. This example illustrates homeowners shouldn't focus on shorter amortization mortgages since the pre-payment feature is a more powerful tool.

Oh and you can still get a 35 year amortization mortgage in Canada today!

To discuss your mortgage financing needs whether you are buying a home, an investment property or renewing your mortgage, please contact Nawar.