Effect of new CMHC rules for Firt time Home Buyer

The difference between a 30-year amortization and a 25-year amortization can significantly impact what first-time homebuyers qualify for in terms of their mortgage.

• 30-Year Amortization: Spreads mortgage payments over a longer period, resulting in lower monthly payments. This can increase affordability, allowing buyers to qualify for a larger loan based on their income. However, over the life of the mortgage, buyers will pay more in interest.

• 25-Year Amortization: Shorter amortization means higher monthly payments, but the mortgage will be paid off sooner, with less total interest paid over time. With higher payments, buyers might qualify for a smaller mortgage compared to the 30-year option.

Qualification Impact Based on Income

Lenders typically calculate how much a buyer can borrow based on their gross debt service ratio (GDS) and total debt service ratio (TDS), which account for a percentage of income that can go toward mortgage payments and other debts. With a 30-year amortization, your monthly mortgage payments are lower, meaning you may be able to afford a higher-priced home.

For more specific advice or scenarios based on your income and financial situation, feel free to contact Dave Oliver, TMG Mortgage Professional, to get personalized details on how these rules impact what you qualify for!

Let's break this down based on the 39/44 GDS and TDS ratio (Gross Debt Service and Total Debt Service) and a $70,000 annual income, comparing the maximum mortgage amount for both 25-year and 30-year amortization periods, with CMHC fees included.

Step-by-Step Calculation

1. GDS (39%): This is the portion of your income that can go toward housing costs (mortgage payments, property taxes, heating costs).

• GDS: 39% of $70,000 = $27,300/year or $2,275/month.

2. TDS (44%): This ratio includes not only housing costs but also other debts (like car loans, credit card payments).

• TDS: 44% of $70,000 = $30,800/year or $2,567/month.

We assume you’re maximizing GDS for this example, but in practice, lenders also account for TDS.

3. CMHC Fees: These fees are for mortgage default insurance, required when down payments are less than 20%. CMHC fees are typically 2.8%-4% of the mortgage amount and are added to the mortgage balance.

Now, let’s calculate maximum mortgage amounts for both amortization periods:

1. 25-Year Amortization:
   • Higher monthly payments due to a shorter repayment period.
   • Assume a typical interest rate (e.g., 5%).
2. 30-Year Amortization:
   • Lower monthly payments due to the extended period.
   • Same interest rate assumption.

Since mortgage calculations involve detailed formulas, let me compute the approximate mortgage amount you'd qualify for under both amortization terms. I'll factor in CMHC fees too.

With a $70,000 annual income, a 39/44 GDS/TDS ratio, and assuming a 5% interest rate:

• 25-year amortization: You could qualify for a maximum mortgage of approximately $403,700 (including CMHC fees).
• 30-year amortization: You could qualify for a higher mortgage, approximately $439,600 (including CMHC fees).

The 30-year option allows for a larger loan due to the lower monthly payments spread over a longer period. 

Call Dave Oliver at 306 227 7367

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