Purchase Plus Improvements Mortgage

General Joni Ferguson 30 Jun

Purchase Plus Improvements Mortgage.

When it comes to shopping for your perfect home, it can be hard to find the exact one ready to go! If you are looking into a home that requires improvements, there is a mortgage product known as Purchase Plus Improvements (PPI). This type of mortgage is available to assist buyers with making simple upgrades, not conduct a major renovation where structural modifications are made. Simple renovations include paint, flooring, windows, hot-water tank, new furnace, kitchen updates, bathroom updates, new roof, basement finishing, and more.

Depending on whether you have a conventional or high-ratio mortgage, if it is insured or uninsurable, and which insurer you use, the Purchase Plus Improvements (PPI) product can allow you to borrow between 10% and 20% of the initial property value for renovations. Additional insight on how the qualifying structure works can be found in the table below:

Type Requirement
Uninsurable $40,000 or 10% of the “initial” value of the property, whichever is less
CMHC Insurable Can exceed $40,000 but not 10% of the “as improved” value of the property.
Sagen™/Canada Guaranty Insurable Can be 20% of the “initial” value of the property but the improvement amount cannot exceed $40,000

The main difference between a regular mortgage and a purchase plus home improvements program is the need for quotes. As part of the verification process, your mortgage professional and the lender will need to see a quote for the work that is planned for the improvements. The quotes will provide us with the cost and plan details required to secure the final approval.

Working with your realtor, your mortgage professional will help guide you through the final approval process, which works as follows:

  1. Find a home
  2. Apply and get approved for a Purchase Plus Improvements mortgage
  3. Get firm quotes on the improvements
  4. Get an appraisal for the estimated as-is and as-improved value of the property.
    • This will be ordered by your lender or broker and quotes are typically reviewed by the appraiser.
    • Note: If you are putting less than 20% down payment on the purchase, often only a final inspection is required to confirm the work on the quotes has, in fact, been done.
  1. Close the purchase
  2. Depending on your down payment, the lender may provide up to:
    • 80% of the as-improved value, less the cost of improvements (if on an uninsured mortgage)
    • 95% of the as-improved value, less the cost of improvements (if on a default-insured mortgage)
  3. Start the improvements
    • The initial advance of funds will be up to 95% of the approved value of the property minus the improvements. You will usually have to pay a portion of the improvements upfront via savings, credit card, personal line of credit, parental funds, etc.
  4. Notify the lender when the project is complete
    • At this point, an inspector/appraiser will confirm the work has been completed to the specifications agreed by the lender
    • Once the lender verifies the inspection report, the balance of funds is advanced.

If you have questions about how a Purchase Plus Improvements Mortgage could work for you or are considering taking this route for your next home, please do not hesitate to contact me for expert advice!

Published by DLC Marketing Team

Your Home Buying A-Team.

General Joni Ferguson 21 Jun

“Your Home Buying A-Team”.

There are four major components to any successful home buying A-Team: your mortgage professional, realtor, home inspector and lawyer.

Each of these individuals is important to various aspects of the home buying process.

MORTGAGE PROFESSIONAL

While many people think a real estate agent is the most important person when it comes to buying a new home, your mortgage professional comes first. This is especially true for anyone looking to pre-qualify for a mortgage before searching for their forever home! Not only does pre-qualification help you establish your budget, but it can also lock in a low rate for you for up to 120 days while you search for your perfect home

When it comes to choosing a mortgage professional, there has been a recent upward trend in using a mortgage professional to arrange mortgage financing. Many banks are cutting back on staff and centralizing operations to save money. While this doesn’t affect the day-to-day finances, it can create a headache when it comes time to discussing and finalizing a mortgage agreement.

You may not know much about mortgage professionals, but they are steadily gaining popularity due to providing top-notch service and unbiased advice. Also, unlike individual banking representatives who often move from one branch to another, mortgage specialists work to form lifelong relationships with their clients. The dedication of mortgage professionals to their clients and their unique position in the mortgage market often results in finding lower rates for their customers and providing the best possible plan to ensure their clients financial success.

One of the reasons mortgage professionals are able to find their clients such amazing deals when it comes to mortgage interest rates is that they operate independently of any single financial institution. Banks are only able to access their rates – no one else’s. Mortgage brokers, on the other hand, have access to MORE rates and lenders than the bank! In fact, a typical broker has access to over 90 lenders! This means they are able to shop around, on your behalf, to find the most affordable option thereby saving you tons of time and money in the long run.

So, not only can a mortgage professional shop around for you AND save you money on your interest rate, their services are almost always free to the homebuyer! Due to the fact that mortgage professionals get paid by the lenders directly! What else can you ask for? Better rates, personalized service, flexibility and products at no cost to you. Some people may argue that the fee is built into the payment, but this is not so. It costs the banks approximately 40 per cent less to generate a mortgage through an agent than a branch, as there is no overhead to pay if the bank doesn’t get a client’s business. Instead, the mortgage broker bears the entire cost of day-to-day business activity and the bank simply pays for the privilege of gaining you as a client.

Your mortgage professional has also developed relationships with numerous realtors and is also able to recommend a qualified realtor to help you through the home-buying process.

WHO CAN FUND YOUR MORTGAGE?

Mortgage professionals have access to a variety of lenders to ensure they find you the best rate, but who exactly are these lenders?

BANKS

A bank is a financial institution that accepts deposits, lends money and transfers funds. Banks are listed as public, licensed corporations and have declared earnings that are paid to stockholders and are regulated by the federal government’s Office of the Superintendent of Financial Institutions. Most Canadians know the five big banks: BMO, Scotiabank, CIBC, RBC and TD Canada Trust. Big banks are great options for variable rate mortgages as they have smaller penalties if you have to break the mortgage for any reason. When it comes to fixed-rate mortgages however, the penalty can be quite large when compared to different types of lenders.

CREDIT UNIONS

Credit unions also deposit, lend and transfer funds much like a bank, but beyond that there are some major differences between the two.

Credit Unions have an elected Board of Directors that consists of elected members from their community. They are local and community-based organizations and, unlike the banks, are provincially regulated versus federally.

One major advantage of getting your mortgage through a credit union versus a bank is that the credit unions are not subject to the recent “stress test” changes for uninsured mortgages (excluding Quebec). This is due to the fact that credit unions are provincially regulated and the stress test is a federal regulation. Of course, your ability to pay down your debt will still be tested, but not at the higher rate.

Another advantage of using a credit union is that the calculation for penalties when it comes to breaking a mortgage agreement are typically friendlier to the borrower, and, if there are credit issues, they tend to be more understanding than the big banks.

MONOLINES

A monoline is a type of financial service that specializes in consumer credit, home mortgages or a sole class of insurance. While these businesses typically do not have branches and are mainly accessed through a mortgage professional, there are some advantages to the consumer when it comes to using a monoline lender.

The first is that monolines usually offer better discounted rates and how they calculate the penalties can be friendly to the client. The biggest strike against them is they’re just not as well-known or trusted as a bank. It should be noted, however, the major investors in monolines are the big banks, so there’s nothing really to fear.

ALTERNATIVE LENDERS

If for any reason you are not able to get approved for a mortgage through traditional lender channels, there is another option – Plan B. In fact, these secondary lenders make up almost 10 percent of mortgage transaction volume! That said, there are a few things to know.

The first is that alternative lenders often provide higher interest rates than A-lenders as it is a more risky investment. In addition, most B-lenders will charge a one-time fee of 1% of the loan amount. However, if you have no other options this is still a viable way to get approved!

Mortgage professionals have access to a fair number of alternative mortgage lenders (B-lenders) who offer excellent solutions above and beyond the traditional branch-based options. When mortgages are arranged through an agent with an A-lender, the charge is covered by the lender directly. However it is important to note that there may be a fee when sourcing an alternative mortgage lender.

WHAT DOES A LENDER NEED TO KNOW?

Before a mortgage can be approved, there are a few things that your lender or mortgage professional needs to know.

INCOME AND JOB STABILITY

The first thing that your mortgage professional or lender will ask for is details surrounding your income and job stability.

Your income will determine how much money you can borrow. In most cases, 35 percent of your gross income for salaried, non-self-employed or commissioned people is used to determine how much you can borrow to cover the cost of the mortgage payments, taxes and any applicable maintenance. All other debts (car loans, credit cards and lines of credit, etc) must not exceed an additional seven per cent of your gross income.

It is also important to note that sticking with your employer while going through the home buying process is crucial. Any changes to your employment or income status can stop or greatly delay the mortgage approval process.

CREDIT HISTORY

Your credit history and credit score are used to show that you pay your bills on time. A great credit score includes keeping a balance on credit cards at any given time that is below 30 percent of the total card limit – and paying it off monthly. A credit rating above 680 puts you in a good position to get financing while a score below will result in higher interest rates or a more challenging mortgage acquisition.

If you’re new to the world of credit, consider the 2-2-2 rule. Lenders want to see two forms of resolving credit (ie: credit cards) with limits no less than $2,000 and a clean payment history for two years.

WHAT DO YOU NEED ONCE YOUR OFFER IS ACCEPTED?

Once you have put in an offer on your dream home and it has been accepted, there are a few things you will need to finalize your mortgage agreement.

INCOME CONFIRMATION

Supplying your income details to the lender for pre-approval helps to determine your budget and how much you can borrow. Once you are ready to finalize the mortgage, you will need to confirm this information. For salaried individuals this can be done by submitting a letter of employment, your most recent pay stub, your last two years income and Notices of Assessment from Revenue Canada.

DOWN PAYMENT CONFIRMATION

The lender will require that you prove the source of your down payment. You’ll have to send in bank statements, RRSP statements, stocks, etc that show the previous three-month history of your accounts. If there are any large lump-sum deposits, you’re likely to be asked to show where the deposit originated. You’ll also be asked to demonstrate that you have access to 1.5 percent of the purchase, in addition to the down payment, to ensure you are able to cover closing costs such as: legal fees, Title Insurance, property tax prepayment and Property Transfer Tax.

CONTRACT OF PURCHASE AND SALE

This is a copy of the accepted offer of the home you intend to purchase and a copy of the MLS listing sheet. The purchase contract will also be accompanied by a Property Disclosure Statement and a Strata Form B Disclosure if applicable.

REAL ESTATE AGENT

As you may already know, a real estate agent is one of the most vital members of your homebuying A-Team! In fact, in today’s competitive real estate market, it can be very difficult to acquire property WITHOUT the help of a realtor.

One of the reasons realtors are integral to the home buying process is that they can provide access to properties that never even make it to the MLS website. Realtors also gain access to information about homes that may come onto the market before a listing is even signed.

Most importantly though, a realtor understands the ins-and-outs of the home buying process and can tell you how to be successful in your endeavors to purchase a home by guiding you through the process from the first viewing to having your bid accepted.

HOME INSPECTOR

While a competitive market can make a home inspection more difficult, it is a highly recommended part of the home buying process! Having a home inspection done is important to ensure that there are no hidden surprises which may crop up after the sale is finalized. A home inspector can determine what’s behind the walls and look for any signs of mold, leaks or old wiring that could cost you down the road. A good home inspector can often be recommended by your mortgage professional or realtor who may know of many reliable options for getting your inspection done.

While most people assume home inspections are just for the buyer, that’s not always the case. If you’re selling a home, you might want to consider a home inspection too! Any issues that come up during an inspection by a potential buyer can lead to delays and kill a deal all together, but scheduling a certified inspection prior to putting the home on the market, could save you time and ensure a smooth process once you do start getting offers!

LAWYERS AND NOTARIES

Now your ready with your financing and purchase property, you will need a lawyer or notary to draw up the documents and register them on file for you. Since the visit to your legal professional is the last step in the entire process, it’s extremely important that this be handled with care. A mortgage professional can recommend a qualified lawyer or notary who specializes in real estate transactions that can help streamline this process.

Written by my DLC Marketing Team

The Rate Debate.

General Joni Ferguson 16 Jun

The Rate Debate.

One of the first questions that potential buyers want answered is: “What is your interest rate?”

It is easy to think that this is the most important question, but there is a lot more to your mortgage contract than just the rate. And so, the rate debate continues!

The rate debate is a hot topic in the mortgage world. Not just the rates itself, but the importance of the rate versus other factors in the mortgage – such as terms and penalties. As a borrower, it can be easy to get caught up in one thing but, if you’re not paying close attention, ignoring other factors could cost you in the long run.

Before we get into these other factors, let’s talk rate. While not the only factor, it does continue to be an important decision criteria with any mortgage product. The interest rate is the percentage of interest you are paying on the principal loan; lower interest rates means more money to the mortgage and who doesn’t want that?

VARIABLE VS. FIXED

There are two types of mortgage rates: variable-rate and fixed-rate. A fixed-rate is just that – a fixed amount of interest that you would pay for the term of the mortgage. A variable-rate, on the other hand, is based off of the current Prime Rate, and can fluctuate depending on the markets.

Fixed rates are typically tied to the world economy where the variable rate is linked to the Canadian economy. When the economy is stable, variable rates will remain low to stimulate buying.

Fixed-Rate Mortgage: First-time homebuyers and experienced homebuyers typically love the stability of a fixed rate when just entering the mortgage space. The pros of this type of mortgage are that your payments don’t change throughout the life of the term. However, should the Prime Rate drop, you won’t be able to take advantage of potential interest savings.

Variable-Rate Mortgage: As mentioned, variable-rate mortgages are based on the Prime Rate in Canada. This means that the amount of interest you pay on your mortgage could go up or down, depending on the Prime. When considering a variable-rate mortgage, some individuals will set standard payments (based on the same mortgage at a fixed-rate), this means that should Prime drop and interest rates lower, they are paying more to the principal as opposed to paying interest. If the rates go up, they simply pay more interest instead of direct to the principal loan. Other variable-rate mortgage holders will simply allow their payments to drop with Prime Rate decreases, or increase should the rate go up. Depending on your income and financial stability, this could be a great option to take advantage of market fluctuations.

BEYOND RATES

When considering your mortgage, other considerations such as penalties can be important factors for deciding on a mortgage product. If you have two competing products, say 1.65% interest fixed-rate and a 1.95% interest variable-rate, it seems as though it is a pretty easy decision. But, what about the ability to make extra payments? And what are the penalties?

It is easy to think that nothing will change throughout your 5-year mortgage term, so you probably haven’t even considered the penalties. However, when looking at the fixed versus variable rate mortgage, penalties can be quite different. Where variable rates typically charge three-months interest, a fixed rate mortgage uses an Interest Rate Differential (IRD) calculation.

Given that nearly 70% of fixed mortgages are broken before the term ends, this is an important variable. Fixed-rate mortgages are typically okay when the penalty is your contract rate versus the Benchmark rate. However, when penalties are based on the Benchmark rate (sometimes called the Bank of Canada rate), it is typically much higher than your contract rate, resulting in greater penalties.

In some cases, penalties for breaking a fixed mortgage can sometimes be two or three times higher than that of a variable-rate. While the interest rate is lower, lower penalties are sometimes best should anything happen down the line.

CONVENTIONAL VS. HIGH-RATIO MORTGAGE

Another consideration beyond just the interest rate, is whether or not you will be obtaining a conventional or a high-ratio mortgage. Whenever possible, it is recommended to put 20 percent down payment on a new home. This results in a conventional mortgage. However, as not everyone is able to do this, many buyers will end up with a high-ratio mortgage product.

So, what does this mean?

High-ratio mortgages need to be insured by either Genworth Financial, the Canada Mortgage and Housing Corporation (CMHC), or Canada Guaranty. This is due to the Bank Act, which will only allow financial institutions to lend up to 80 percent of the homes purchase price WITHOUT mortgage default insurance. Insurance on the mortgage is important to protect the lender should you default on your payments, leaving the insurer to deal with the borrower.

The difference between conventional and high-ratio mortgages is that high-ratio mortgages require insurance, which results in an insurance premium. This is added to and paid along with the mortgage, but is an important factor when considering your monthly payments. These premiums are based on the loan to value (LTV), which is the amount of the loan versus the value of your home.

All high-ratio mortgages are regulated to have mortgage insurance, but some homeowners with a conventional mortgage may choose to pay for mortgage insurance to get a better rate.

SMART QUESTIONS TO ASK

To ensure you understand your mortgage contract, and how it could affect you now and in the future, we have compiled a few smart questions to ask before you sign.

  1. What is my interest rate? Can I qualify for a better one?
  2. Do you recommend fixed or variable-rate?
  3. What are the penalties for breaking my mortgage?
  4. Are there any pre-payment penalties?
  5. Will I require mortgage insurance? If so, what are the premiums?
  6. What will my monthly payment be?
  7. Is my mortgage portable?

These are just a few examples of good questions to ask. It is important to do your own research and be diligent with any contract you are signing. Contacting a Dominion Lending Centres mortgage broker today can help ensure you understand what you are agreeing to, and that you are getting the best mortgage product for you!

Written by my DLC Marketing Team

Insurance Products.

General Joni Ferguson 16 Jun

Insurance Products.

People don’t always want to talk about home insurance, but when it comes to your house there is no better investment than insurance. But, with the number of insurance products available, it can be hard to know where to start! While it can seem overwhelming, it’s a good idea to get familiar with the basics of some of the required and optional insurance coverage when it comes to your home.

Default Insurance

The first and perhaps most common form of insurance when discussing the mortgage space is known as “default insurance”. The purpose of mortgage default insurance is to protect the lenders, allowing them to lend money more aggressively.

This type of insurance is mandatory for any homes where the buyer puts less than 20 percent down on the purchase. In fact, default insurance is the reason that lenders accept lower down payments, such as 5 percent minimum, and actually helps these buyers access comparable interest rates typically offered with larger down payments.

In Canada, there are only three companies that offer default insurance: Canada Mortgage and Housing Corporation (CMHC), which is run by the federal government and two private companies: Genworth Financial and Canada Guaranty.

Default insurance typically requires a premium, which is based on the loan-to-value ratio (mortgage loan amount divided by the purchase price). This premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.

According to CMHC, the minimum down payment required for mortgage loan insurance depends on the purchase price of the home:

  • For a purchase price of $500,000 or less, the minimum down payment is 5 percent.
  • When the purchase price is above $500,000, the minimum down payment is 5 percent for the first $500,000 and 10 percent for the remaining portion.

It is also important to note that default insurance (or mortgage loan insurance) is available only for properties with a purchase price or an improved/renovated value below $1 million.

Title Insurance

Another insurance policy that potential homeowners may encounter is known as “title insurance”. This is an insurance policy that protects residential or commercial property owners and their lenders against losses relating to the property’s title or ownership. In fact, it is so important to lenders that every single lender in Canada requires you to purchase title insurance on their behalf. It is not a requirement to have coverage for yourself, but that doesn’t mean you should dismiss it outright.

Title insurance can protect you from existing liens on the property’s title, but the most common benefit is protection against title fraud. Title fraud typically involves someone using stolen personal information, or forged documents to transfer your home’s title to him or herself – without your knowledge. The fraudster then gets a mortgage on your home and disappears with the money. As the old adage goes: “It’s better to be safe than sorry” and the same goes for insurance.

Similar to default insurance, title insurance is charged as a one-time fee or a premium with the cost based on the value of your property. Title insurance for the lender is typically $250 to $300, while title insurance for yourself runs around $125 to $150. You can purchase title insurance through your lawyer or title insurance company, such as First Canadian Title (FCT).

Mortgage Protection Insurance

Before you sign off on your mortgage, there is one more type of insurance your mortgage broker should tell you about – Mortgage Protection Insurance. Despite being optional, it should still be considered. Almost every mortgage broker in the business has a story of someone who passed on the extra coverage and tragedy hit.

Unfortunately, life happens but it doesn’t have to happen to your home. While you may not want to spend the money now, or maybe you already have some type of life insurance policy through work, don’t discount this option as it is often a blessing in disguise – especially when it comes to homeowners with a spouse and children. Can they carry on with the mortgage payment? If not, they would be forced to sell on top of everything else. For a few extra dollars a month, mortgage protection insurance provides that safety net in the event it is ever needed.

When it comes to choosing a mortgage protection plan, there are a number of different policies available depending on your budget. Manulife’s Mortgage Protection Plan offers immediate insurance and can be canceled at any given time. If you think you may be covered through your work, it can’t hurt to take a closer look at the policy.

Mortgage insurance is what we consider “debt replacement” and life insurance is more fitting as an “income replacement”. This is an important distinction and you should understand the difference. You also need to see just how much you’re going to get through your life insurance policy; you may be surprised just how little it amounts to.

Property + Fire Insurance

Lastly, after you’ve signed off on your mortgage you need to close on the home. Before you do this, your lender is going to require home insurance. When it comes to home insurance, there are many different types of coverage however it generally protects you from damage to the home that is accidental or unexpected, such as a fire.

Home insurance can also cover the contents of your home, depending on your insurance package. For individuals looking at purchasing condos or townhouses, this is especially important! The insurance from strata typically protects the building itself and common areas, as well as your suit “as is”, but it will not account for your personal belongings or any upgrades you made. Be sure to cross-check your strata insurance policy and take out an individual one on your unit to cover the difference.

One final thing to consider with regards to home insurance is that, just because you have home insurance you’re not necessarily covered in the event of a flood or earthquake. Depending on where you live, you may need to purchase additional coverage to be protected from a natural disaster. It’s best to talk to your insurance provider to confirm that you are covered.

At the end of the day, purchasing a home is a huge investment. Why risk it when there are so many great insurance products to ensure your investment – and family – remain protected? Reach out to a Dominion Lending Centres Mortgage Professional today to find out what coverage is needed and how to go about getting it!

written By my DLC Marketing Team

Benefits of Home Ownership.

General Joni Ferguson 15 Jun

Benefits of Home Ownership.

So, you have decided to utilize your buying power in the Canadian retail market and are looking to purchase a home – congratulations! This is a great step towards ensuring your future.

As a potential homeowner, there are some amazing benefits that we think you should be aware of right out of the gate:

  1. Homeownership is the single largest source of savings for Canadian households.
  2. Your payments build equity (as opposed to renting, where your money goes to the building owner).
  3. Equity you build in your home can be used as security for other loans.
  4. The return on investment is substantial – in fact, the average price of a house for sale on the Canadian real estate market has increased every year since 1998.
  5. While other investments can prove volatile, investing in real estate is a solid use of your hard earned money.

Buying a home is not just about equity and investments, but it is about the future. While it is important to know what a mortgage is and how much you qualify for (and can afford), ensuring your new home is so much more than numbers. In these changing times with the cost of living constantly increasing, having home equity to fall back on can have a huge impact on your quality of life. Not only that, but owning your own home gives you a sense of pride, a feeling of security and the freedom to design the perfect living space for yourself – without having to ask permission from strata or a landlord! Moving into your first apartment or moving on up to your first house is an incredible step in the journey of life!

Now, as excited as you are to get started, you probably have some questions! Let us take you through some of the most important things to know when it comes to home ownership to ensure your experience is as smooth as possible – and provides the best possible outcome for you!

WHAT EXACTLY IS A MORTGAGE?

It is amazing how many people really don’t know what a mortgage is. Maybe you weren’t sure you would be in a position to have one or maybe you just never asked! Never fear – we have the answers.

To keep it simple, a mortgage is a loan that is specific to properties and homes. This type of loan uses the home or land you purchase as security in the event the loan cannot be paid. Mortgages are registered as legal documents and can be obtained through a variety of sources (or lenders) including banks, credit unions and alternative lenders or through the use of a mortgage broker!

MORTGAGE TERMS TO KNOW:

Principle The principal is the amount of the loan that is actually borrowed.
Interest Rates As with any loans (credit cards, lines of credit, etc) interest will be incurred. This is the amount that the lender charges for the privilege of funds borrowed. The amount of your interest payment will depend on the interest rates, which vary depending on terms and conditions of the mortgage and the borrower’s credit history.
Mortgage Payments These can occur monthly, semi-monthly (twice a month), bi-weekly (every other week), accelerated bi-weekly or weekly and are made to the lender. These payments encompass both payments to the principal amount borrowed, as well as interest charges.
Amortization Period This is the number of years it will take to repay the entire mortgage in full and is determined when you are approved. A longer amortization period will result in lower payments but more interest overall as it will take longer to pay off. The typical range is 15 to 30 years.
Term Term is the length of time that a mortgage agreement exists between you and the lender. Rates and payments vary with the length of the term. The most common term is a 5-year, but they can be anywhere from 1 to 10 years. Generally a longer term will come at a higher rate due to the added security. A “Fixed Mortgage” means you are locked in at the interest rate agreed for a longer length of time.A “Variable Mortgage” features an interest rate that is adjusted periodically to reflect market conditions.
Maturity Date The maturity date marks the end of the term. At this time, you can repay the balance of the principle or renegotiate the mortgage at the current rates. Note: If you choose to repay or renegotiate the mortgage before the term is up, penalties may be charged.

HOW MUCH DO I QUALIFY FOR AND WHAT CAN I AFFORD?

One of the biggest factors to purchasing a home is knowing how much you qualify for when it comes to a mortgage – and how much you can afford!

To determine the amount of the mortgage you qualify for, banks will utilize a set of ratios which determine the amount of your income that will be used to pay down the debt. These ratios are Gross Debt Servicing (GDS) and Total Debt Servicing (TDS).

It sounds confusing, but let us help break this down for you!

GROSS DEBT SERVICING (GDS) RATIO

The first ratio, Gross Debt Servicing (GDS) is the percentage of gross income that is required to cover housing costs. If you are looking at getting an insured mortgage (less than 20 percent down payment on the purchase price) the limit is 32% GDS. For uninsured mortgages (20 per cent or more down payment) the limit is 39% GDS.

To calculate this, you would take any home-related expenses (mortgage payments, property taxes, utilities and strata fees when applicable) and divide them by gross monthly income to get your GDS percentage.

Gross Monthly Income $4,500.00
Mortgage Payment $1,000.00
Property Taxes $200.00
Heating Expenses $150.00
Total Expenses $1,350.00
Gross Debt Servicing (GDS) 30%

The rate of 30% GDS is well within the requirements and would be approved.

TOTAL DEBT SERVICING (GDS) RATIO

The other ratio banks use is known as Total Debt Servicing (TDS). This is the percentage of your gross income required to cover housing costs (same as with the GDS) but also any other debts. The guidelines for an insured mortgage (less than 20 percent down) has a limit of 40% TDS while an uninsured mortgage (20 per cent or more down) is 44% TDS.

To calculate this, you would take all home-related expenses (mortgage payments, property taxes, utilities and strata fees when applicable) and other debts (credit cards, personal loans, student loans, car payment or a line of credit) and divide them by gross monthly income to get your TDS percentage.

Gross Monthly Income $4,500.00
Mortgage Payment $1,000.00
Property Taxes $200.00
Heating Expenses $150.00
Student Loan Payment $100.00
Car Payment $300.00
Total Expenses $1,750.00
Total Debt Servicing (TDS) 39%

The rate of 39% TDS is well within the requirements and would be approved.

DECLARING YOUR INCOME

In order to get approved for the mortgage, you need to declare your income so the bank can compare it to your expenses and determine the ratios noted above.

If you are employed with a company, you would provide an employee statement declaring minimum guaranteed gross wage OR last two-year average if there were bonuses or commissions that put your income above your guaranteed wages. If the most recent year was lower, that year will be used instead of the average.

If you are self-employed, you would provide the average of your last two years of income based on line 150 of your tax returns. It is important to know that there are programs available for self-employed borrowers in cases where the two-year average does not qualify them for a mortgage. Just ask your mortgage broker!

BE SMART!

There are many cases where buyers will qualify for more than they intend on spending – but don’t get greedy! It is vastly more important, especially for your first home, to stay within a budget that you can afford each month instead of overextending yourself simply because it is available to you. The most important aspect is that your payments are reasonable and affordable. There are always options to move to a larger home in the future!

So, you have decided to utilize your buying power in the Canadian retail market and are looking to purchase a home – congratulations! This is a great step towards ensuring your future.

Written By the DLC Marketing Team