To qualify for a mortgage, you must first pass a stress test.
The stress test tells your lender if you have the income and assets needed to afford your mortgage payments, even if interest rates go up. Your results are based on how much you could pay in a “worst case” scenario.
Depending on whether or not you need mortgage loan insurance (you will need mortgage insurance if you have less than 20% as a down payment), your lender will calculate your mortgage payments based on the higher interest rate of either:
- the Bank of Canada’s conventional five-year mortgage rate; and
- If you need loan insurance, the interest rate you negotiate with your lender
- If not, the interest rate you negotiate with your lender plus 2%.
You could also try a credit union or another lender not regulated by the Government of Canada. These lenders are not required to use a stress test.
How Much Can You Borrow?
Generally, up to 32% of your gross annual income can be spent on housing hosts (this includes mortgage payments plus utilities plus property taxes). Therefore, any mortgage you are approved for cannot have monthly mortgage payments that, when added to your monthly utility and property tax payments, exceed 32% of your monthly income.
In addition, your total debt-to-income ratio cannot exceed 44%. That means that your total debt payments (including housing costs, car payments, credit card payments, etc.) cannot exceed 44% of your gross income.
Some lenders may give you a mortgage if your debt exceeds these amounts. It just means you are taking a bigger risk, as is the lender, and your interest rate will likely be higher.
Your Down Payment
Your lender will ask for a 25% or more down payment and lend you the difference through one or more mortgages. You must take the down payment from your own resources. Your family and friends may help you with it.
Unless your credit is poor, you will probably want a single mortgage. Interest rates are higher if you need a second or more mortgages.
Your Mortgage Term
Your loan will be based on a term, typically from six months to 10 years. The term you choose depends on how much you can afford for monthly mortgage payments, interest rates and personal preference. Your long-term goals also affect your term. Do you plan to keep your home or is it a short-term investment?
At the end of the term, you can pay out the loan in full or part or, provided your credit is good, renew it. If you have credit problems, you may have to shop around or use a mortgage broker to find a new lender.
Amortizing Your Loan
Your loan amortization period is the number of years it will take to pay off the loan. A long amortization period, such as 25 years, can reduce your monthly payments. You will pay more monthly for a shorter amortization period, but less in interest because your loan is paid off quicker.
Pick an amortization period that:
- fits your budget, and
- suits your plans – how long you hope to keep your home.
Fixed Rate or Variable?
Choosing a fixed-rate mortgage keeps your interest rate and payments stable. They stay the same for the length of the mortgage term. Once the term is up, you can pay off your loan or renew it. Your new interest rate and terms can be negotiated with your lender.
Variable rate mortgages can save you money, if you are prepared to pay more if interest rates go up. As interest rates change, your mortgage payments change too. Many people choose this option if their income is secure and they can afford to take a risk.
You can switch from a variable to fixed rate at any time, usually for a small penalty.
Lowering Your Downpayment
You can get a mortgage with less than 25% and as little as 5% down.
High-ratio mortgages of up to $500,000 are available with 5% down. Down payments go up to 10% for any amount over $500,000, up to $1 million. Homes over $1 million require 20% down.
Who Offers High-ratio Mortgages
High-ratio mortgages are guaranteed by:
- Canada Mortgage and Housing Corporation (CMHC)
- or Canada Guaranty.
Any bank, credit union or other lender can help you apply.
Mortgage Loan Insurance
On top of your high-ratio mortgage, you will also pay mortgage loan insurance. Insurance protects the lender in case you are unable to make your payments. The insurance is added to your monthly mortgage payments, for the entire life or amortization period of the loan. The amount you pay depends on your down payment. A lender can calculate this for you.
Borrowing from Family or Others
Instead of a lender, you could borrow from family, friends or colleagues.
As long as you keep up the payments and they are fine with lending to you long term, private mortgages can be a good option. A private mortgage may be more flexible. You can avoid the stress test and you may be able to negotiate better terms, such as no down payment or no or lower interest rates.
Before you agree:
- Put it in writing. Axess Law’s real estate lawyers can draft private loan documentation and register your loan.
- Discuss what you will do if you have problems making the payments or the lender needs their money back.
- Ask a financial advisor how the mortgage might affect your taxes.
- Ask Equifax or other credit reporting bureaus if they will count your mortgage payments in your credit score. They may decline or charge a fee.
- Consider a gift of money instead.
Borrowing and lending money can cause friction. Be sure your relationship can survive if your situation changes.