A potential client called today to ask for short term (six month) interest rates. He was buying his first home with 5% down. With less than 25% down, the mortgage company must go through a "default insurance" company. There are two of these companies, Canada Mortgage & Housing Corporation (CMHC) or G.E. Capital GEC). These companies no longer dictate that the applicant must take a minimum term, however the client must qualify at the higher of the contract rate or the three year posted rate.

I quoted him the 6 month rate but asked him why he would choose the six month rate when the 5 year rate is at close to the same rate? His financial planner had told him that had he bought ten years ago and had taken 6 month concurrent term all along that he would be much better off than if he had taken two five year terms. While the above statement is true, the interest rate spread between the 6 month term and the five year term is so slight, it makes no sense to gamble on concurrent 6 month terms in today's market place. The mortgage insurance companies are trying to tell you the same thing by insisting that you qualify at the three year posted rate. It is my view that the mortgage rates will indeed go up in the foreseeable future. I fear for the first time home buyer that an escalation in the rates may cause irreparable cashflow demands, which in turn could cause a multitude of other credit problems. Had you still been renting, and your landlord offered a 5 year freeze on the rent, would you not have jumped for joy? It is the same thing for the new home owner. You have, within your grasp, the chance of freezing the mortgage payment for five years (or longer), don't fool around with destiny. All new mortgages with this default insurance attachment may now be transferred to your next house without penalty, so even if you sell the present house, you can bring the mortgage with you. There is no down side to taking a longer term.

The 5% down plan is now available for all purchasers, not just for first time buyers. The only restrictions are that of impeccable credit, a maximum house price of $125,000 ($175,000 in the urban Ottawa area, and $250,000 in the urban Toronto area), and qualifying salaries. The latter subject, that of qualifying salaries, can be a real problem. Incomes for salaried employees with two years history on the job is the gross (pre-tax) salary. Incomes for commissioned or self-employed individuals are restricted to the last three year average of declared taxable income. Once you have established the income, only 32% of that amount will be used for payment of principal & interest on the mortgage, property taxes, and heating. You must also qualify for useage of no more than 40% of that income for all your debts, inclusive of the house. That last statement means that even if you have no other debt, you cannot exceed 32% of income for the house, or if alternate debt accounts for greater than 8% of income, your maximum mortgage capability will be affected. For 95% financing, very few exceptions will get through the mortgage insurers.