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:
- Homeownership is the single largest source of savings for Canadian households.
- Your payments build equity (as opposed to renting, where your money goes to the building owner).
- Equity you build in your home can be used as security for other loans.
- 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.
- 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!