Mortgages

Posted May 28th 2020 in

Qualifying For A Mortgage

When shopping for a home it’s important to determine the maximum mortgage and home price you can qualify for. To determine your maximum affordability, lenders take several factors into account, including:

  1. Down Payment
  2. Credit Score
  3. Income
  4. Debts

There are several steps you can take to increase your maximum affordability:

  • Increase your down payment – This will give you the ability to increase your affordability and purchase a more expensive home.
  • Increase your credit score – This will help strengthen your qualification, as it shows your trustworthiness in making payments. Paying bills on time and keeping balances low on credit cards are ways to increase your score.
  • Pay off your debts – This will lower your TDS ratio and free up more of your income for your mortgage payment, ultimately giving you the ability to carry a larger mortgage and therefore more expensive home. One of the biggest considerations are car loans or leases, as well as credit card debts.
  • Increase your income – This is the tougher option, but it will allow you to afford a larger monthly mortgage payment, which will increase the overall size of the mortgage you can afford to borrow and repay. Alternatively, you can apply for your mortgage with your partner, or get a co-signer, such as your parents, to guarantee your mortgage.

Debt Service Ratios – What Are They?

Debt service ratios are set by the Canada Mortgage and Housing Corporation (CMHC), and are used to calculate the maximum mortgage a lender can offer you. Debt service ratios include your gross debt service ratio and your total debt service ratio (GDS & TSD). This maximum mortgage is then combined with your available down payment to determine the maximum home price you can purchase.

Your lender will use these ratios to ensure you can consistently make your monthly payment as they place a limit on the amount of your income that can go towards your housing expenses and monthly debt obligations. The industry standard guideline for GDS is no more than 32% and the guideline for TDS is no more than 40%, however you may be allowed to exceed these limits if you have a stable source of income and good credit. If the mortgage you want to take on, forces your GDS or TDS above 39% and 44% respectively, you will not be approved for that amount.

CMHC Insurance

Mortgage default insurance, which is commonly referred to as CMHC insurance, is mandatory in Canada for down payments between the minimum of 5% and 19.99%. Mortgage default insurance protects lenders, in the event a borrower ever stopped making payments and defaulted on their mortgage loan.

Mortgage default insurance is financed through your mortgage. Unlike closing costs such as legal fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Instead, your mortgage default insurance premium is added to your mortgage amount and paid off over the life of your loan.

There is only one way to minimize your mortgage default insurance: increase your down payment as a percentage of your home price. To do this, you either have to increase the amount you put down or purchase a less expensive home.

To talk to a local mortgage representative in Durham Region, call The Baird Team today!

Minimum Down Payment

A mortgage down payment is the amount of money you pay upfront when purchasing a home. When submitting a deposit for a home when an agreement to purchase is reached, the deposit becomes part of the down payment. For example, if you need $40,000 as a down payment, and you submit $10,000 as a deposit for a home, you now only need a further $30,000 for the down payment at the time of closing the transaction.

What is the minimum down payment required in Canada?

The minimum down payment in Canada depends on the purchase price of the home:

  • If the purchase price is less than $500,000, the minimum down payment is 5%.
  • If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000, and 10% of any amount over $500,000.
  • If the purchase price is $1,000,000 or more, the minimum down payment is 20%.

Mortgage default insurance, commonly referred to as CMHC insurance, protects the lender in the event the borrower defaults on the mortgage. It is required on all mortgages with down payments of less than 20%, which are known as high-ratio mortgages. A conventional mortgage, on the other hand, is one where the down payment is 20% or higher.

The size of your down payment influences three things

The amount you put down at the beginning of your mortgage shapes three important outputs over the life of the mortgage:

  • The home price you can afford
  • The size of your mortgage and monthly payment
  • The amount of CMHC insurance you pay

1. Your down payment influences the home price you can afford

Because the minimum down payment in Canada is 5%, this benchmark is used to determine your maximum affordability. Ignoring your income and debt levels, you can infer your maximum purchase price based on the size of your down payment. Naturally, as your affordability is also a function of your income and debt levels, you should visit our mortgage affordability calculator for a more detailed analysis.

2. Your down payment shapes the size of your mortgage and monthly payment

A larger down payment reduces the size of your mortgage, and, therefore, the monthly payment and interest you will pay over the life of your mortgage.

3. Your down payment determines the amount of CMHC insurance you pay

Your CMHC insurance premium, calculated as a percent of your mortgage amount, gets smaller as you increase your down payment.