LOOKING TO PURCHASE? PLAN ADEAD!
With mortgage rule changes in full swing both federally and provincially, now more than ever, it is critical to get all your ducks in a row ahead of shopping for a new home.
Borrowing money has become a more difficult process in recent years. Lenders require a lot more documentation than in the past.
If you have full-time employment, most lenders require your Notice of Assessments (NOA), pay stub and letter of employment. Getting this upfront could save you lots of time and headaches. If you’re self-employed, using bonus income, writing off expenses, and declaring any additional income, will require you to provide two years’ worth of your Notice of Assessments to verify your income. If you don’t have a copy of your NOAs handy, qualifying for a mortgage is going to take a little more time now as you have to request documentation from CRA and could take up to 4 weeks.
Treasure your Credit Score
Your credit score plays a vital role in being approved for a mortgage. Being mindful of paying bills on time, not going over the limit, keeping your credit limits to reasonable amounts are all part of important requirements you need to a hearing in order to keep a healthy score.
Tips to help you understand How to Improve Your Credit Score
The higher your credit score the lower the interest rate you will be eligible for when getting a mortgage. Below are a few quick tips that can help you improve your credit score:
- Pay off all outstanding debt
- Keep your number of credit cards to a minimum
- Check your credit report accuracy on a yearly basis
- Limit the number of loans, lines of credit or credit cards you apply for
- Maintain low-to-moderate balances
- Never borrow more than you can afford
- Always pay your bills on time
Work with a mortgage professional or your bank to secure a pre-approval. They will take your income, down payment, closing costs etc. and do a calculation to determine how much you can qualify for. Keep in mind that the approval does not automatically mean you get a home. Once you have a firm sales agreement in place, the lender will still have to do an assessment on the property you are wanting to purchase to ensure it meets all of their requirements. Too, they will verify all your documents to ensure the application you provided is correct. This would involve calling your employer, checking pay stubs, collecting bank statements. So, the more of this part of the application they can do up front, the easier it will be when you find your dream home!
Don’t forget about the New Mortgage Stress Test
In October 2017 Canada made further changes to the mortgage and housing rules and introduced the so called “stress test” to all candidates applying for a mortgage. Previously only applicants with less than 20% or fewer than a 5-year mortgage term had been subject to these rules. The stress test helps identify if you could still afford your mortgage if you were to go through an increase in interest rates, loss of employment and other financial circumstances.
For uninsured home buyers (purchasers who have a down payment of 20% or greater) the minimum qualifying rate is based on either the Bank of Canada’s 5-Year Benchmark Rate (BOC) or the current rate offered by the lending institution plus 2%. Whichever is greater.
Purchasers putting down less than 20% (or insured home buyers), must qualify on the BOF 5-Year Benchmark Rate or the current rate offered by the lending institution (without adding the extra 2%) – whichever is greater.
So if your lender offers a rate of 3.49%, given that you put down less than 20 %, you would have to use the 5.34% benchmark rate in your stress test. If you make a 20% down payment or more and your lender offers a rate of 2.99%, you will have to qualify using a rate of 4.99%.
Although the new mortgage rules were implemented to protect the housing industry and keep Canadian’s debt in check, the changes also mean you may have to lower your purchase price.
For example: If you have a household income of $87,000 and made a down payment of 20%. Before the new rules went into effect, you would have been able to afford a maximum purchase price of $508,069 (based on a 2.99% rate). Now, because of the new mortgage rules, you’ll have to qualify at the BOF 5-Year Benchmark rate. Meaning your potential maximum purchase price would now be $393,716, which works out to 22.5% less than under the previous rules.
Fixed Vs Variable Rates – Which is Right for You
Over the past year, the Bank of Canada has continued to raise its overnight benchmark rate. These increases have many home buyers wondering if they are better off with a variable or fixed rate.
Fixed rates are starting to rise, however, they offer steady monthly payments while a variable rates remain lower but are riskier.
Overall, we do need to keep in mind that we are still in a historically low-interest rate environment. For a rule of thumb; consumers that are risk averse, feel more secure with a fixed rate mortgage knowing each month what their payment will be and budget accordingly.
For consumers that can tolerate more risk with fluctuating rates, a variable might still be the best solution given the current rates keeping in mind that the variable rate can be locked into a fixed rate with most lenders at any time. Some variable rate clients also choose to stay in a variable while having their lender withdraw the mortgage at the posted fixed rate, thus having more go towards the principle of their mortgage. Too, there are blended rate mortgages available with some lenders to consider whereby half of the mortgage is variable and the other half is fixed.
Whichever way you decide to choose, it is very important to have a mortgage review every year with your lender to ensure you are still in the best product and saving the most amount of money.