Ever wondered what juicy tips mortgage brokers share with their friends? When friends ask me for mortgage advice, I offer the same tidbits I share with clients. Here’s a rundown of what I’d say:
- For conventional mortgage deals (ones where insurance is not required because the buyer is putting down at least 20 per cent), big lenders are usually more lenient than smaller ones on the borrowers’ debt-to-income ratio as long as they are within their budget (for instance, anticipating extra income). Your total debt service ratio or TDS refers to the portion of your gross monthly income that goes towards debt such as housing costs, car loans, student loans credit card balances or lines of credit. To be a desirable candidate for a mortgage, your TDS shouldn’t exceed 44 per cent if you have good credit (or 42 per cent if your credit isn’t as strong). Say your total monthly debt was $3,500 and your monthly gross income was $8,000. To calculate your TDS ratio, divide the total debt of $3,500 by $8,000 in monthly income. The result is .4375, which you’d then multiple by 100 and round to 44 per cent. Depending on the strength of your credit, you might need a larger lender who’s a bit more lenient.
- Be wary of restricted mortgage with high penalties. It’s not worth saving a few dollars per month and paying thousands more in a prepayment penalty if you decide to sell your property before renewal. Some lenders are charging 2.75-3 per cent of the outstanding balance instead of the three month’s penalty on a variable mortgage. That typically equates to thousands of dollars more than they would pay on a non-restricted mortgage. Also steer clear of collateral mortgages (where a lenders the mortgage as collateral and registers a higher amount on title), because you can’t transfer out on renewal.
- Most importantly, I remind friends and clients that it’s not all about the interest rate. Rates should be a factor in your decision but not the sole decision-maker. Also think about the terms, penalties and whether you need features like portability.
- When choosing between a variable and fixed interest rate, a variable rate’s penalty is usually the same between monolenders and big banks or credit unions. If you want a fixed rate, I always recommend going with a monoline lender as the prepayment penalty is much smaller. Most people don’t plan on breaking their mortgage but it does happen, so it’s something to think about.
Client or friend, I always encourage people to buy what they can afford and potentially upgrade later than stretching themselves beyond their current means. Many people focus on mortgage rates, but overall affordability is more important than the actual interest rate. Estimating costs and working through your budget can help you find a property and mortgage that you can realistically afford.