Tips for boosting affordability in T.O.’s competitive market
With rising housing prices and a shifting interest rate environment, affordability continues to be a top concern among homebuyers searching for their dream home. Fortunately, there are ways to increase mortgage affordability when buying in a competitive real estate market.
Invis, one of Canada’s largest mortgage brokerages, offers the following tips to consider as you arrange financing:
• Revisit your current debts. When applying for a mortgage, a lender will look at your total debt service ratio (TDS), or how much of your total income is being spent on various types of debts, including car loans, credit cards, and other consumer loans. A mortgage broker can advise on restructuring your current debt (by increasing the amortization and lowering payments on your car loan, for example), to ensure that your TDS ratio is acceptable to lenders.
• Consider a longer amortization. This year, some lenders have started offering mortgages with amortizations longer than the traditional 25-year amortization. A 30-, 35- or even 40-year amortization will allow buyers to access more expensive properties, but they will also have to pay more in interest over the life of the mortgage. Borrowing $200,000 with a five-year fixed mortgage at 5.5 per cent with an amortization of 25 years would involve monthly payments of $1,220.78. With an amortization of 30 years the monthly payment for the same mortgage would be $1,127.81; and with a 35-year mortgage the monthly payment would be $1,065.92.
Those opting for a longer amortization should plan to make lump sum payments down the road or increase their monthly payments (say, after receiving a salary increase), to lessen the amount of interest they pay throughout the life of their mortgage.
• Increase the size of your down payment. Increasing the size of your down payment means a lower monthly payment. On the purchase of a $250,000 property, a five-per-cent down payment ($12,500) would result in a monthly payment of $1,449.68, while a 15-per-cent down payment ($37,500) results in a monthly payment of $1,297.08 — assuming financing at 5.5 per cent and an amortization of 25 years.
A common way to generate extra cash for a larger down payment is to make use of the federal Home Buyers’ Plan which allows qualifying purchasers to withdraw up to $20,000 each from their registered retirement savings plans (RRSPs) to buy or build a qualifying home without incurring tax penalties.
• Consider adding a rental suite. For some homeowners, a rental suite allows them to generate added income which can be put towards the mortgage. But remember, many lenders require the suite to be legal before they will count any income it may generate. Most importantly, ask yourself if you would be happy with the responsibilities of being a landlord — you’ll have to rigorously screen tenants, field repair requests, and in some cases track down overdue rent payments.
• Explore the option of a stated income mortgage. For the self-employed, or salaried workers with a side income, stated income mortgages offer a way to include non-traditional sources of income during the mortgage application process, such as tips, business from home, and part-time work.
“Today’s homebuyers are concerned with getting the most for their housing dollar,” says Invis president and CEO Andrew Moor. “Mortgage brokers can offer valuable advice throughout the financing process as well as access to mortgage options and services many homebuyers don’t even know exist.”