Top 4 Factors to Consider When Choosing Your Mortgage
Nasim Yusufi
Your trusted Expert: Combining Mortgage Services and Real Estate Broker Espertise for your Home Journey
Securing a mortgage can feel daunting––even to the most experienced borrowers. But don't let that deter you: If other homebuyers' experiences are any indication, odds are you'll eventually find a loan that works well for you.[1]
The key to finding the right mortgage is to look for one that you’ll feel comfortable with long after you've closed on your new property. In addition to comparing term lengths and interest rates, also consider how the loan will fit your daily life and preferences.
For example, we recommend asking yourself questions such as: Are you a natural risk taker, or do you prefer firm plans and predictability? Can you afford a bigger mortgage payment if interest rates increase, or are your anticipated home expenses already stretching your monthly budget?
To help you get started, we've rounded up four of the most important factors to consider when narrowing your list of potential mortgage options.
1. Your Credit Score
The best-priced mortgages typically go to borrowers with scores of at least 720 or more. But if your credit score is lower, you still have options.[2] To qualify for an insured mortgage with less than 20% down, you or a co-borrower will likely need at least a 600 credit score, unless you're a Canadian newcomer.[3] Many conventional lenders offer special loans called “newcomer mortgages” to immigrants who have landed within the past five years.[4]
However, if your score is low because you have a history of missed payments or a high credit utilization ratio (which is the amount of debt you have relative to your credit limit), then you may not qualify for a conventional mortgage and may need to look to alternatives, like nonbank B or C lenders. However, be prepared to pay more in interest if you go that route.[5,6]
2. Your Income and Expenses
When evaluating your creditworthiness, a lender will compare your income to the total amount of debt you'll carry once you've bought the home. This is called your total debt service (TDS) ratio. The Financial Consumer Agency of Canada caps the recommended TDS ratio for a mortgage from a federally regulated entity at 44% of a borrower's income. However, some nonbank lenders are more lenient.[7]
In addition to outstanding debts, lenders take into account other expenses unique to a home, such as property taxes, heating costs, and 50% of condo fees, if applicable. To pass Canada's mortgage stress test (which is necessary for any federally regulated lender), your total housing costs should not exceed 39% of your qualifying income. This is called your gross debt service (GDS) ratio, and it's a key to consider when comparing potential homes.[7]
3. Your Expected Down Payment
The lowest down payment you can get away with is usually 5%, however, depending on your income and credit history, a lender may require more. And since conventional mortgages with down payments below 20% automatically require mortgage default insurance, you'll need to account for that added expense.[8]
In most cases, mortgage amortization will be capped at a maximum of 25 years if you opt for an insured mortgage. With an uninsured mortgage, by contrast, you could extend your mortgage amortization to 30 years or possibly even longer. That could help make your monthly payments more affordable.[9] Keep in mind, though, that mortgages with smaller down payments not only cost more over time, they may also be harder to get––especially if there's a major gap between your qualifying income and typical home prices.
4. Your Lifestyle and Risk Tolerance
The key to finding the right mortgage for you is to look for a loan that will fit comfortably into your daily life. If you foresee yourself making extra payments and paying off your mortgage early, then you may prefer an open mortgage. However, a closed mortgage will typically offer a lower rate.[10]Term lengths and rate types are also important to consider. For example, choosing a shorter term or opting for a more flexible variable rate can pay off if interest rates decrease. But if rates unexpectedly pick up, you could come to regret it.[11]
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Five-year fixed rate mortgages, on the other hand, may feel more comfortable to risk-averse borrowers. But locking yourself into such a long mortgage could also be risky. With a longer term mortgage, you not only risk leaving money on the table if rates go down, you also risk getting stuck with a loan that requires a big multi-year commitment.[11]
BOTTOMLINE
Regardless of the loan you choose, it pays to shop around and carefully compare terms. Fortunately, we have a vetted list of mortgage professionals who can explain your options, answer your questions, and help you find the best loan to meet your needs. We can also develop a custom plan for securing a great home that fits your budget. Reach out when you're ready to get started.
The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.
Sources:
2. Rates.ca
3. CMHC
4. Wowa
5. Nerdwallet
6. Ratehub
8. MPA Magazine
11. MoneySense