Mortgage vs. HELOC
One of the first steps in determining if you are eligible for a mortgage is to get qualified. Bankers and other lenders in Canada will ask several key questions to determine your eligibility. Here are some main ones:
The first thing a banker wants to know is, do you earn enough money to make payments on time?
The lender measures your income versus your monthly obligations using things called “debt ratios.” Gross Debt Service (GDS) ratio is one of them.
The calculation is as follows: (monthly mortgage payment + monthly heating costs + monthly property taxes) ÷ (gross monthly income).
Another is the Total Debt Service (TDS) ratio.
Its calculation is as follows: (monthly mortgage payment + monthly heating costs + monthly property taxes + other monthly obligations) ÷ (gross monthly income).
If your GDS is less than 35% and your TDS is less than 42%, you have a great chance of mortgage approval. Note: Some lenders allow 39% GDS and 44% TDS, or higher, to well-qualified borrowers.
Our mortgage affordability calculator can help you understand how much you can afford based on your current income and lifestyle.
Have you paid bills on time in the past? Mainstream mortgage lenders always request a copy of your credit report.
A high credit score (e.g., 720+) increases your chances of approval, whereas a low credit score might result in a failed application. The minimum credit score required to secure a mortgage loan depends on the risk tolerance of the lender, but a credit score of 650 is typically considered the minimum for a decent mortgage rate.
Traditional banks have a much lower risk tolerance than credit unions and subprime lenders, who may be willing to approve your mortgage even if your credit history is shaky. However, applicants with bad credit will have to pay a higher interest rate than those with good credit. So, if you can improve your score before applying for a mortgage it can save you money.
If you get into financial difficulty and can't repay the loan, the mortgage lender will repossess and sell your property. Before loaning you anything, they want to be sure that the house is worth the money you are spending on it.
The property value is determined by a range of criteria, including the age of the property, the total square footage and comparable home sales in the same area. A professional appraisal will usually be required before you can get approved for financing, unless the mortgage is default insured or the lender uses an automated appraisal system.
The minimum down payment depends on the purchase price of the property you want to buy:
The amount you put down determines the size of the mortgage you are eligible for and, consequently, the monthly payments you will be required to pay.
By law, if your down payment is less than 20 percent, you must also pay for mortgage default insurance.
The mortgage stress test is a government initiative designed to ensure you can afford your mortgage if rates soar.
To pass the test, you must prove that you can handle payments at a higher rate than the one in your agreement. The justification for this is that interest rates may go up during the term of your mortgage. If you can’t afford to pay a higher rate, there is a danger that you will be forced to default on your mortgage and your property will be repossessed.
For renewals, the stress test is only applicable if you are switching providers. As this is a federal government initiative, most provincially-regulated lenders do not have to use the test at all—albeit many do.
Obtaining a mortgage for the first time
If you are trying to obtain a new mortgage, you have a few decisions to make about the type of loan you need. Ask yourself the following questions.
A fixed rate mortgage is one in which the rate does not change throughout the term. The advantage to this is you will always know what your monthly interest cost will be, and you are not at the mercy of market fluctuations.
A variable mortgage is based on the mortgage lender’s prime rate. As a result, the interest costs can change from month to month. You have to be prepared for these fluctuations, but the rates are often lower than that of their fixed rate counterparts.
Note: Variable-rate mortgages have payments that are fixed (it is the proportion of interest and principal changes as the prime rate changes). By contrast, adjustable-rate mortgages have payments that rise and fall with the prime rate.
An open mortgage is the most flexible of the two options. It allows you to pay off any amount (even the entire mortgage) at any time without penalty. This added flexibility comes at a price; open mortgages have higher interest rates than those on closed mortgages.
With a closed mortgage, your payment schedule is much more restricted, and you will be charged if you pay back too much too soon. However, most closed mortgage terms do allow you to make one lump sum payment per year, sometimes as much as 20 percent of the principal loan amount, without additional fees.
As most Canadians are not in a position to repay their mortgage early, and open mortgages cost more, closed mortgage agreements are much more common than open ones.
If you already have a mortgage and it is coming to the end of its term, it’s time to start thinking about renewal options.
Many Canadians simply re-sign their mortgages for another term, with the same lender and the same rules. This is convenient, but if you’re in this camp, you are potentially missing out on a better deal. Before renewing your mortgage, use Rates.ca to see if other lenders are offering a lower interest rate. A lower rate could literally save you thousands of dollars across a multi-year mortgage.
Quick tip: Never be afraid to negotiate your existing lender’s renewal offer. Most mortgage rates are negotiable, even renewal rates.
Whether you are obtaining or renewing a mortgage, consider retaining a mortgage broker to represent you. For qualified borrowers, their services entail no out-of-pocket cost (as they get paid commission by the lender). Their experience negotiating with lenders could save you time and money.
Most importantly, before you approach any mortgage lender, use Rates.ca to shop around and compare the market. Not only can you easily start your mortgage process through our site, but knowing current market rates gives you more bargaining power when negotiating with your lender of choice.