When it comes to figuring out finances, most monthly payments including loans and interest rates aren’t too complicated to figure out. Canadian Mortgages can be a bit more mystifying for many people to calculate.
That said, calculating mortgages doesn’t have to be rocket science. First, you need to understand the basics. The rest will come quickly after.
So, let’s get started!
The Basics of Canadian Mortgages
If you’ve recently made the decision, or are still in the consideration process, of buying a home in Canada using a mortgage there are several basics you’ll need to know. For beginners, you’ll need a down payment of at least 5% if the home you’re looking at has a cost of $500,000 or less. Properties of a higher retail value require an additional 10% on anything over the initial $500,000.
The Financial Consumer Agency of Canada provides more detailed information about down payment requirements for Canadian mortgages.
Once you’ve made the decision to obtain a home through the use of a Canadian mortgage, there are several options as far as actual lenders are concerned. Primary forms of lenders include:
- Caisses populaires
- Credit unions
- Insurance companies
- Loan companies
- Mortgage companies
- Trust Companies
Each of the lender-types mentioned above will have different conditions and interest rates. That said, it is vital that you do your research and speak with as many lenders as possible before coming to a final decision. Sure, you can always switch lenders later, however, penalties may apply to such situations. Hence, it is crucial that you are comfortable with your lender as well as fully understanding the conditions of your mortgage contract before signing.
Am I Eligible for a Mortage in Canada?
The next step in your quest to obtain a Canadian mortgage is to prove to your lender that you’re able to afford the amount of money you’re borrowing to purchase your new home or property. To establish yourself as capable of affording the mortgage payments, lenders will first need to access several pieces of information concerning your current financial standing.
This information includes, but is not limited to, the following:
- Your credit score
- Your total debts
- Amounts of outstanding loans
- Your total income before taxes
- Your total expenses including costs of living and monthly utilities
The above taken into consideration, monthly housing costs need to amount to less than 32% of your gross income. This number is known as the GDS ratio, or gross debt service ratio. Your monthly house costs include your property taxes, mortgage rate, 50% of your condo fees (if you’re taking a mortgage out on a condo), and your monthly heating costs.
Also, your total debt load, or debt service ratio, should account for 40% or less of your gross income as well. Total debt load includes everything from credit card payments, student loan payments, child support, car payments, and any other significant payments.
You can calculate your GDS and total debt services using the official Mortgage Qualifier Tool offered by the Canadian government.
If by chance your calculation suggests you’re not yet eligible for pursuing a Canadian mortgage, you can do one of the following:
- Pay off/reduce your overall debts
- Search for a home in a lower price range which you’ll be more likely to qualify for
- Begin saving money to purchase a home via providing a larger downpayment
How Do I Get Pre-Approved for a Mortgage in Canada?
Another strategy for calculating Canadian mortgages is to speak with financial institutions before seeking out a suitable piece of property to purchase. A mortgage lender will be able to calculate and pre-approve precisely how much you’re qualified to borrow including at what rates your payments will be.
A few of the most significant benefits that come with getting pre-approved for a mortgage in Canada are:
- It saves time when you’re ready to make an offer
- Interest rates will be locked in for a period of typically three months
- You’ll be fully aware of how much money you’re eligible to borrow
When seeking a pre-approval for a Canadian Mortgage, be sure to ask how long the pre-approved rate is set for, if the rate can be extended, and what happens if the rates go down during this period.
That said, refrain from relying solely on any one lender to determine the amount you can afford. Instead, based on your total income after taxes and overall expenses, perform your own calculations. Furthermore, leave yourself plenty of breathing room to account for factors such as maintenance, repairs, hikes in interest rates, and other costs associated with purchasing a home.
What Is the Difference Between a Standard Mortgage and High Ratio Mortgage in Canada?
If you have performed basic calculation and decided to move forward with purchasing a home through a Canadian mortgage, you’ll be presented with a variety of solutions. The most common of these options are standard, or conventional, mortgages, and high ratio mortgages.
The following are the main benefits and differences between the two:
Standard Canadian Mortgage
A standard mortgage in Canada, or conventional Canadian mortgage, is ideal for both first-time and repeat homebuyers. They are most excellent for those with solid credit scores and plenty of money for down payments. Even more, the standard mortgage is attractive for those who are looking for a lower down payment.
Most significant benefits of standard mortgages are down payments as low as 3%, a minimum credit score of 620, and loan limits of just under $485,000 to approximately $726,500. That said, several other conditions and various requirements may apply.
High Rato Canadian Mortgage
A high ratio mortgage in Canada is typically reserved for first-time buyers and those who possess 20% or less of the required down payment for buying a home. Also, to be considered eligible for this sort of mortgage you’ll need to even qualify for mortgage insurance via one of three significant insurers; Canada Guaranty, CMHC, or Genworth.
Furthermore, to qualify for a high ratio mortgage in Canada, of up to 95% of the value of your home, you’ll need to meet specific criteria including long-term employment, a suitable credit score, and amortization (25 years).
A Final Word About Calculating Canadian Mortgages
All-in-all, learning how to calculate Canadian mortgages is a piece of cake once you get into the nuts and bolts of it. Hopefully, the information in this article has answered any questions you might have on the subject. If however, you are left with any questions, please feel free to get in contact with one of the experts at Citadel Mortgages. We’ll be more than happy to clarify any questions you may have and help you get qualified for a mortgage today!