People who buy homes and renew mortgages in the second half of 2020 will benefit from interest rates that would have seemed unimaginably low at the beginning of the year.
But we also have a mortgage market that has never been as complex and fast-changing as it is today. The latest example can be seen in mortgage lending changes that took effect July 1.
If you buy a home with less than a 20-per-cent down payment and get mortgage default insurance from the Canada Mortgage and Housing Corp., the minimum credit score to qualify has risen to 680 from 600. Also, your mortgage plus various housing-related costs and other borrowings must now eat up a slightly smaller percentage of your income.
Let’s look at some tools you can use to prepare yourself for these new requirements and other aspects of home buying and mortgage renewal.
Find out your credit score
Banks that offer free access to your credit score include Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Royal Bank of Canada, and the credit card issuer Capital One does likewise. You can also get a free score from the online lender Borrowell and Credit Karma, a financial hub offering credit cards, loans and mortgages.
The free credit scores you get may differ from the ones your lender views, but they will give you a good sense of where you stand. By the way, your score is not affected if you check it now and then. What can affect your score is multiple hits by lenders – it suggests you’re desperate for money.
Calculate your debt load
People applying for mortgages insured by CMHC must now have a gross debt-service ratio of 35 per cent (down from 39 per cent), which means that mortgage payments, property taxes and heat must not account for more than $35 of every $100 in gross household income. The total debt service ratio, which adds other debts to the picture, should not be more than 42 per cent (down from 44 per cent) of income.
You can quickly find out where you stand with both ratios using the debt service calculator offered by CMHC.
Brief yourself on the mortgage market
For further reading on how mortgage rates are set, try the clearly written briefing from the Bank of Canada.
For some perspective on just how unusually low mortgage rates are today, try the historical mortgage rate database at ratehub.ca.
First, get a big picture look at the overall rate environment using the mortgage dashboard on the Canadian Mortgage Trends website. Included here are:
- the prime rate used by lenders to price variable-rate mortgages (and home equity lines of credit);
- the five-year Government of Canada bond yield, which has a big influence on five-year fixed mortgage rates;
- the benchmark qualifying rate, which is used to stress test mortgage applicants to see whether they can afford their homes if interest rates rise (this rate is currently 4.94 per cent);
- a typical rate for fixed five-year and variable-rate mortgages.
Next, survey the best rates available in your province for the type of mortgage and term you want using RateSpy’s detailed listings. Be sure to note how the rates change depending on whether you have a down payment of less than 20 per cent. Below that line, the rates are often better because mortgage insurance addresses default risk for lenders.
A low rate is the foundation of a good mortgage, but you should also look into how much you’re allowed to pay down the mortgage every year and penalties for breaking the loan before it comes up for renewal. Mortgage penalties vary a lot and, at the big banks in particular, can be staggering.
You might well end up with two mortgages to compare, each with a different combination of rates and terms. Which one will cost least from month to month, and by how much? Answers can be found using the mortgage payment calculator on Ratehub.ca, where you can compare four different mortgage offerings. You can also use it to compare a variable and fixed rate mortgage, and look at how different amortizations would affect your payments and total interest paid.
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