Mon. Mar 9 - 6:13 AM
MORTGAGE LENDERS use formulas to determine how much of a mortgage a homebuyer can carry. A total debt-service ratio factors in housing expenses, plus all other debt obligations, such as car payments, credit cards and student loans.
Typically you can qualify for a mortgage if these debts add up to no more than 44 per cent of your gross monthly salary.
However, it may not always be a good idea to take out the maximum mortgage for which you qualify.
"Quite often, what a person qualifies for, and what they can actually afford with their lifestyle, are two different things," says Bob Goudey, a mortgage broker with Invis in Dartmouth. Goudey sees many cases of homebuyers becoming overextended as expensive cars, vacations and entertainment result in what was otherwise an affordable home becoming a budget-breaker.
"When values were going up, people were able to refinance in a year's time and get out of that debt, but that's not the case now," Goudey says. "Do a budget, and make sure you're not overextending."
With interest rates at historic lows, this is an excellent time to consolidate other debt inside a mortgage. Rates went almost as low as they can go last week, when the Bank of Canada slashed its key short-term rate to an all-time low of 0.5 per cent. Commercial banks quickly followed suit, cutting the prime rate to 2.5 per cent.
"If you're in the last year of the term, it's a good time to get in and renew early to take advantage of the low rates and combine it with some other debts," Goudey advises.
The low rates also make a variable-rate mortgage very attractive. If the prime moves up while you're in a variable rate mortgage, you have the flexibility, in almost all cases, to lock into a fixed term.
"If you're going to go for a variable rate, then get one that specifies 'best discounted rate' for conversion," Goudy said. "Some contracts may set it at a percentage of the posted rate, or with others you may have to negotiate it at the time."
Many lenders are open to negotiating longer fixed terms, up to 10 years in some cases. If you like the security of knowing what your mortgage payments will be for a set number of years, then this is an option to consider.
Longer amortization periods have put home ownership within reach of a growing number of Canadians, and an increasing number of buyers are extending their mortgages to 30 or 35 years. Longer amortization should be used as a strategy to get into the housing market, but not as a long-term approach, as it results in far more interest paid over the life of the mortgage.
An extended amortization should be combined with making maximum use of prepayment options to pay down the mortgage as early as possible.
Lenders have different rules about the type and amount of prepayment that you can make. A conventional mortgage will allow a 10 per cent lump sum payment annually, or the ability to double your payment in any given month.
There is also the interest-only mortgage. With this product you pay only interest, and the principle remains unchanged throughout the term of the mortgage. A homeowner using this type of mortgage would build equity in the home only if property values increase.
Goudey recommends buyers get a mortgage pre-approval, which will help establish a price range. Lenders will typically lock in a rate for 120 days when pre-approving potential buyers for a mortgage.
Typically you can qualify for a mortgage if these debts add up to no more than 44 per cent of your gross monthly salary.
However, it may not always be a good idea to take out the maximum mortgage for which you qualify.
"Quite often, what a person qualifies for, and what they can actually afford with their lifestyle, are two different things," says Bob Goudey, a mortgage broker with Invis in Dartmouth. Goudey sees many cases of homebuyers becoming overextended as expensive cars, vacations and entertainment result in what was otherwise an affordable home becoming a budget-breaker.
"When values were going up, people were able to refinance in a year's time and get out of that debt, but that's not the case now," Goudey says. "Do a budget, and make sure you're not overextending."
With interest rates at historic lows, this is an excellent time to consolidate other debt inside a mortgage. Rates went almost as low as they can go last week, when the Bank of Canada slashed its key short-term rate to an all-time low of 0.5 per cent. Commercial banks quickly followed suit, cutting the prime rate to 2.5 per cent.
"If you're in the last year of the term, it's a good time to get in and renew early to take advantage of the low rates and combine it with some other debts," Goudey advises.
The low rates also make a variable-rate mortgage very attractive. If the prime moves up while you're in a variable rate mortgage, you have the flexibility, in almost all cases, to lock into a fixed term.
"If you're going to go for a variable rate, then get one that specifies 'best discounted rate' for conversion," Goudy said. "Some contracts may set it at a percentage of the posted rate, or with others you may have to negotiate it at the time."
Many lenders are open to negotiating longer fixed terms, up to 10 years in some cases. If you like the security of knowing what your mortgage payments will be for a set number of years, then this is an option to consider.
Longer amortization periods have put home ownership within reach of a growing number of Canadians, and an increasing number of buyers are extending their mortgages to 30 or 35 years. Longer amortization should be used as a strategy to get into the housing market, but not as a long-term approach, as it results in far more interest paid over the life of the mortgage.
An extended amortization should be combined with making maximum use of prepayment options to pay down the mortgage as early as possible.
Lenders have different rules about the type and amount of prepayment that you can make. A conventional mortgage will allow a 10 per cent lump sum payment annually, or the ability to double your payment in any given month.
There is also the interest-only mortgage. With this product you pay only interest, and the principle remains unchanged throughout the term of the mortgage. A homeowner using this type of mortgage would build equity in the home only if property values increase.
Goudey recommends buyers get a mortgage pre-approval, which will help establish a price range. Lenders will typically lock in a rate for 120 days when pre-approving potential buyers for a mortgage.
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