You may know you can save interest by looking for the lowest interest rate or making bi-weekly payments. Here are some key features you should consider when looking for a mortgage:
- Competitive interest rates.
- Weekly or bi-weekly payments. Switching to bi-weekly payments can shave some years off your mortgage and save you interest.
- Pre-Payment Options. Ask if you will be allowed to make lump-sum payments without penalty.
Read my article on how to pay off your mortgage for more information.
How Much Mortgage Can I Afford?
Banks and other mortgage lenders use two financial ratios to determine how much mortgage you can afford. These are called the Gross Debt Service ratio (GDS) and the Total Debt Service ratio (TDS).
- Gross Debt Service ratio (GDS) is your mortgage payments including interest, plus property taxes, heating costs, and half of any condominium fees should not be more than 32% of your gross (pre-tax) monthly income.
- Total Debt Service ratio (TDS) includes your GDP plus your other debts including car loans, credit card payments, other instalment loans, and alimony payments. Your TDS should not be more than 40% of your gross (pre-tax) monthly income.
Lenders will also look at your credit history to determine if they want to lend to you. You need to ensure your beacon score is sufficiently high enough to obtain a mortgage.
How Much Down Payment?
Traditionally mortgage lenders require a down payment of 25% of the value of the home you are purchasing. If you have less than 25% you may be required to obtain CMHC Mortgage Insurance.
CMHC Mortgage Insurance
CMHC is a federal government crown corporation that protects the lender if you fail to pay your mortgage. As a result, your mortgage lender can offer you a lower rate of interest and larger amount of loan. However, CMHC insurance comes with a price.
If you are required to have CMHC insurance, the lender will include this amount in your mortgage payments. The amount varies with the amount of mortgage you need, but can be as high as 2.75% of the value of the mortgage.