With COVID-19 challenges that include layoffs and deferred mortgage payments, getting a mortgage may be a bit tougher for some, whether it’s for a first home, or refinancing to consolidate debt, or simply renewing your existing mortgage with a new lender to take advantage of a lower interest rate. But it doesn’t mean you’re shut out of the market completely. It just means you have to plan ahead and be careful managing your debt load.
Lenders generally look at two primary factors to determine whether you qualify for a mortgage loan — the Five Cs of Credit, and at a couple of ratios. It’s these ratios that are affected by changes to interest and qualifying rates.
The first factor is your ability to make your mortgage payments and your willingness to make those payments. This factor is categorized into five variables. They are:
Capacity: Can you repay the mortgage loan? This is the most important of the five. A lender will look at your credit report and review your debts to see if you’ve paid them on time. Lenders don’t like to see missed payments consistently. One or two missed payments are okay if they can be explained away.
Capital: This is the amount of money you have to invest in the property yourself.
Collateral: Yes, your cash flow is important but so is the property you’re buying. The house is pledged as security for the loan.
Character: This is subjective: It’s an impression of your trustworthiness. It’s the big picture. Lenders look at how long you’ve been employed and how secure you are. They will also look at your ability to save and manage your credit.
Credit: This is your credit history – the more years you’ve been an active credit user the better.
Now, the ratios. There are two critical ones that lenders use to determine your ability to service your debt – your gross debt service ratio or GDS and your total debt service ratio or TDS. To qualify for an insured mortgage loan or a high-ratio mortgage, your GDS cannot be higher than 39% of your gross income. GDS is the amount spent on housing — principal mortgage payments, interest, taxes and heat. The TDS includes all your debt and cannot be higher than 44% of your gross income.
Currently, we are in a low rate environment and the Bank of Canada suggests rates will stay low for at least another year. Despite the challenges of getting a mortgage, especially in areas where house prices are rising, there is still market activity.