I am new to Canada, how can I qualify for a mortgage?
By Nick Holloway
Canada has always been recognised as very welcoming to newcomers and prides itself on its wide diversity of population. According to the 2016 Census, 7.5 million foreign-born people have arrived in Canada through the immigration process, representing over 1 in 5 persons in Canada. Having personally emigrated from the UK to Canada in 2014, I am proud to be included within that statistic!
When it comes to sourcing mortgage financing, one of the challenges newcomers think about is the fact they have a limited history in Canada for lenders to review for a credit application. However, there are many options open for new to Canada applicants which are designed for newcomers who have landed in Canada within the last 5 years which assist in overcoming some of these challenges. A mortgage application between a borrower and lender is primarily built on 3 main pillars, being employment income, credit history and down payment. I will cover in more detail each of these pillars from the perspective of new to Canada applicants.
Typically a lender will accept a 3 month full time employment position in Canada as sufficient to verify income, or if they arrive on a corporate relocation program, the 3 month period may be waived. If the applicant is self-employed or business for self, the income verification might be overcome by increasing the down payment amount.
As a credit score is required for determining mortgage applications, a newcomer may not have a significant history with the major Canadian credit agencies such as Equifax or Trans-union. In lieu of a mature credit score in Canada, the lenders may consider a strong international credit report to support the application, alternatively they might look for a 12 month history in Canada of responsibly paying rent as well as utility billing in the applicants name.
Depending on the income and credit factors above, the down payment can start from as low as 5% of the purchase price, assuming these funds are from the applicants own resources and held in accounts in their name for longer than 90 days. For any down payment which is less than 20%, this is called a high ratio mortgage which requires mortgage default insurance to be paid which can be added to the mortgage total. It is important to note that high ratio mortgages in Canada provide the borrower access to some of the most competitive mortgage rates available to the market. Once the default insurance has been paid on the initial purchase, it can often be ported to any subsequent property purchases so the borrower might be able to benefit from these competitive rates for any following mortgages they hold.
There are many factors which go into a mortgage application which differ depending on your individual circumstances. For an accurate assessment of your specific mortgage needs, it is best to discuss your options with a licenced Mortgage Agent who can review all the components which go into creating your mortgage application and will help to set up a plan for you to achieve home ownership here in Canada. If you have any questions and want to discuss your mortgage with me, I would be glad to help.
Who has your best “interest” in mind? The posted rate and your discounted mortgage rate explained.
By Nick Holloway
I would like to discuss an important aspectofmortgage lending which the big banks have done a fine job of convincing manyborrowers that they have the right mortgage for you.
Two words Posted Rate.
It is common for home ownersto consider themortgage rate they need to concern themselves with is the 5 year closed fixed rate mortgage. If you are looking to purchase or thinking about renewing, you think this will be a simple matter of checking your banks website to see what therate is, maybe have a quick look what the other big banks are offering too and youll be good to go. The reality is this rate is often hidden from view,instead you are met with the banks posted rate and you expect that your actual mortgage rate will not be calculated anywhere near this rate, so you prepare yourself to negotiate with your bank to obtain the best rate and you set out with one goal, achieve the biggest discount you can from the posted rate. There is nothing wrong with negotiating, some people love it, some people hate it, and if you are familiar with buying a new car from a showroom, it is common that the recommended retail price tends not to be the price the car will be sold at, you may need to make your salesman have a wordwith his manager, his manager with head office, on and on it goes until you have negotiated your discount from the recommended retail price. The price of your mortgage is important, but one should never lose sightthatnot all mortgages are born equal, and an investment in your home should be considered a significant part of a financial plan which protects the best interests of you and your family.
So Nick, what is the advantage of having a posted rate?
For the borrower, there is no advantageto the posted rate.For the bank, well that is a different matter. After having the back and forth with the bank representative, their manager, their head office, you now have a 5 year fixed rate at a set discount from the posted rate, and this will be neatly outlined within your mortgage commitment and terms.
So how does the posted rate provide an advantage to your bank?
The 5 year fixed term is important here, as not all of these mortgages will last 5 years, some may need to be broken early by the borrower for a multitude of different reasons. In fact in Canada, it is common across the industry that around 65% of 5 year fixed rate mortgages will not reach the end of term and this almost certainly triggers a pre-payment penalty for the borrower. This is where the posted rate becomes important for the bank as they tend to work out the penalty in the form of an Interest Rate Differential (IRD) which is a calculation primarily based on the elevated posted rate, not your actual mortgage rate, resulting in a substantially higher penalty that you have little choice but to pay and likely no room for negotiation here! The result of these penalties can be significant, and can vary on a number of different factors based on time to maturity and what movement in the posted rates have occurred since taking out the mortgage, but as a general rule of thumb, you should account for around 4.5% of the remaining mortgage balance to be paid on this type of IRD penalty. On a $400,000 mortgage amount, that amounts to a penalty payment of around $18,000.
Wow, those penalties seem rather steep! Is there a way I can protect myself?
There are many ways to protect yourself from these penalties, the best way is to engage in a licensed mortgage agent or broker who is impartial and can review your application and select the right mortgage products which haveyour best interests in mind. We have access to multiple mortgage lenders and products within our channel and continually negotiate for the best rate on your behalf. Wework hard to make a plan and find tailored solutions that meet each borrowers individual needs. Wetake the time to explain the benefits and associated costs for each and every mortgage so our clients can make an informed decision to proceed with one of the biggest investments youmight make in your lifetime your home.
If you have any questions and want to discuss your mortgage plans in more details, I would be more than happy to help.
The impact of car loans and credit card debt to mortgage qualification?
By Nick Holloway
There has been a lot of talk recently about the new qualification rules in effect which are reducing mortgage affordability by around 20%. The effects of these new rules has largely affected first time home-buyers the most while they are looking to enter the housing market.
How do lenders determine a borrowers qualification?
Lets start with a brief overview of the qualifying ratios, which are worked out as a percentage of the applicants gross income. Firstly, there is the Gross Debt Ratio (GDR) which accounts for mortgage payment, property taxes and heat. Secondly, the Total Debt Ratio (TDS), which accounts for the same as GDR, but also includes all other debts. Note the actual mortgage payment used in these calculations is determined by the qualifying rate, currently 5.34% or 2% above offered rate (whichever is higher), and not by your actual mortgage payment. As an example of the ratios lenders typically use for determining affordability, we can look to current insurer guidelines in Canada which state that if a borrower has a down payment of less than 20%, the highest these ratios are allowed to go is 39% for the GDR and 44% for the TDS.
OK Nick, is there anything I can do to improve my TDS ratios?
Glad you asked, yes there is! To focus on the TDS, we have to know the impact of each kind of debt in the calculations. Currently with credit card debt, its considered a revolving credit line and a monthly payment of 3% of the overall balance is assumed. As an example, if your credit card balance is $2,000, the lenders will assume a $60 monthly payment. With a car or auto loan, the balance is not used in the same way but the monthly payment is looked at instead. For example, lets say your car loan has a remaining balance of $2,000, but you will continue to pay $600 each month until this loan is paid off, so its the $600 payment that will be used in the calculation.
So as we have in the above example for the car payment, we see the same amount of debt has a ten-fold increase in respect of affordability calculations. To put this in terms of how much less affordability this car payment makes to what you can qualify for in dollar terms, we need to look back to the qualifying rate. If we use the 5.34% rate for this example, with a 25 year amortization on say a $100,000 mortgage, then we have a qualifying mortgage payment which equals $601.11. Now we can determine that the car loan under the TDS ratio is reducing the borrowers affordability by roughly $100,000, which might make the difference between qualifying or not for the property you are looking at. If this is the case, my suggestion would be to see if you can settle the car loan early which will decrease the TDS and potentially bring the ratios in-line with the constraint.
If you have any questions and want to discuss your mortgage or this strategy in more details, I would be more than happy to help.