Buying your first home can be confusing. When we talk about qualifying for your mortgage, we mean looking at the ratio of your debt vs. your income and seeing whether you will realistically be able to make mortgage payments.
Your Debt Service Ratio
When it comes to your finances, a lender will want to know what percentage of your income will be used for monthly payments of:
- the mortgage principal and interest
- property taxes
- space heating costs
- strata or condominium fees
- any other debt you may currently have (car loan payments, line of credit, etc.).
There is some variation between lenders as to what percentage will qualify, but as a general rule if you have good credit your total debt service ratio needs to be 44% or less. If you have bruised or bad credit, the percentage drops even lower.
But wait! If you don't have a mortgage deal in place, how will the lender know what the monthly principal and interest payments will be? That's where a qualifying rate comes into play.
Your Qualifying Rate
The rate a lender or mortgage broker will use to qualify your home purchase is mandated by a government agency called the Office of the Superintendent of Financial Institutions (OSFI). Beginning in Fall 2016, if your down payment is between 5% - 19% of the property purchase price (a high-ratio mortgage), you will need to qualify at the Bank of Canada interest rate. This rate is updated weekly, and at the time of writing is 4.79%. You'll sometimes hear this called the benchmark rate.
Beginning in January 2018, if your down payment is 20% or more of the purchase price (a conventional mortgage), you will need to qualify at either the benchmark rate or a rate 2% above your contract rate – whichever is higher.
It's important to know that this is not the interest rate you will actually be paying on your mortgage. Essentially, this is a stress test the government has put in place to see whether you would be able to make your mortgage payments if rates suddenly rose. If your debt service ratio works under these rates, you're eligible for a mortgage in Canada.
What do the qualifying rules mean for a first time home buyer?
It used to be that if you were able to save a larger down payment for your first home, it was easier to qualify for a mortgage. However, the qualifying rate that is used for all mortgage applications eliminates that advantage.
More than ever, your total package matters for your mortgage deal. Your income, debt, credit score and down payment all factor in to whether or not you'll be approved.
Originally posted November 2017; updated September 2020
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals. If you're ready to start your first home buying experience, contact us today for a free consultation with one of our brokers: call Toll-Free 1-855-590-6520 or visit us at 307 Goldstream Avenue during regular business hours. We can also arrange an appointment evenings or weekends to work with you.