Skip to main content

From how much you can afford to the importance of pre-approvals and credit scores — we’ve got the answers

Before buying and picturing yourself in your new house, be sure to find out how much of a home you can afford, get a pre-approved mortgage and consider getting mortgage insurance.iStockPhoto / Getty Images

Just a few months ago, housing markets from coast-to-coast slowed to a near-standstill as COVID-19 cast a pall of uncertainty over Canada’s economy. Buyers and sellers sat on the sidelines, waiting to see what the future would bring.

However, since late spring, home sales have rebounded due to pent-up demand and record-low interest rates that have spurred buyers to get serious about house hunting.

“It’s been somewhat surprising, in the middle of a pandemic, to see the continued strength of housing markets,” says Andy Charles, chief executive officer of mortgage insurance provider Canada Guaranty Mortgage Insurance Company.

There are still some soft spots across the country, Mr. Charles says, “but generally, it’s been much more robust than many of us anticipated.”

It’s a tough call for first-time buyers: Low-interest rates make it attractive to nail down a mortgage, but a competitive market means fewer deals.

Here are some expert tips on what first-time buyers should keep in mind:

1. How much of a mortgage can I afford?

So, you’ve decided it’s time to buy a house or condo. Before you do anything, run the numbers to see how much of a mortgage you can comfortably carry. And be hard on yourself — lenders certainly will.

“Start with your household income,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.

“Don’t include overtime, or bonuses, or anything but your base salary,” he adds, noting that lenders generally don’t include those types of additional income in their calculations since they can fluctuate yearly.

If you’re self-employed, Mr. Golombek recommends keeping a record of past notices of assessment from the Canada Revenue Agency to prove a steady income.

When making a homeowner budget, don’t forget to include legal and closing costs, as well as ongoing expenses such as insurance, utilities, condo fees (if applicable) and repair and maintenance fees. Once you have a rough sense of what you can afford monthly, use an online mortgage calculator to figure out your price ceiling.

You should also talk to a mortgage advisor, who can help you figure out the best options for your situation and find the best mortgage rate.

2. How is your credit rating?

“It’s extremely important for first-timers to address potential credit issues,” Mr. Charles says. “So do your homework and ensure your credit profile is strong.”

Canada’s two major credit-rating agencies, Equifax and TransUnion, offer online platforms to help you find your current score. If it’s on the low side, lenders may be less likely to offer competitive rates; or your mortgage application could be denied. A low credit score will also make it tougher to secure a pre-approval, which is valuable in a competitive housing market (as we’ll see below).

But don’t despair — there’s plenty you can do in relatively short order to boost your score. A dedicated mortgage advisor will help you organize your finances and highlight the quickest and most-effective ways to boost your rating.

According to Mr. Charles, it can be as simple as being more diligent about paying monthly bills on time and not carrying a credit card balance. If you’re aiming to take on mortgage debts soon, prioritize paying down high-interest loans and credit cards first.

Also, keep an eye out for errors when you peruse your credit report. They can happen, and you can notify the credit bureau to correct them.

Getting a pre-approved mortgage means you can "walk in confidently with an offer, knowing you’re ready to go," says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.iStockPhoto / Getty Images

3. Why getting a mortgage pre-approval is a good idea

Strengthening your credit rating not only gives you a better shot at a great rate but also a higher chance of being pre-approved for a mortgage — a must-have when vying for a home in a hot market. Many realtors and financial advisers, including those at CIBC, suggest a pre-approval should be the first step when house hunting, even before hitting the open houses, virtually or in person.

“An offer conditional on financing will be ignored right away in favour of an offer from someone pre-approved,” Mr. Golombek says. “CIBC is definitely encouraging people to pre-approve. We have an online pre-approval application and, with that, you walk in confidently with an offer, knowing you’re ready to go.”

A CIBC mobile mortgage advisor can provide you with a mortgage pre-approval certificate to help you shop with confidence. A pre-approval certificate is based on your verified financial information and establishes the mortgage amount you qualify for. It also guarantees your interest rate for up to 120 days from the date of the certificate.

Plus, a pre-approval certificate allows you to signal to sellers that you are a serious and qualified buyer and you’ll be prepared to walk in confidently with an offer when you see the home of your dreams. It also provides you with some negotiation leverage, especially during a bidding war.

4. Should I go with a fixed or variable mortgage?

“It’s a classic question,” Mr. Golombek says, to which there used to be a definitive answer.

He says studies from the 1990s and 2000s show variable rates were the way to go “because it would result in a lower rate over time.”

However, in today’s ultra-low rate environment, the predictability of a fixed rate can be appealing for homeowners who want a reliable budget. In fact, with rates as low as they are today, Mr. Golombek says a fixed-rate mortgage may end up being insurance against higher rates in years to come.

CIBC offers both variable- and fixed-rate mortgages at competitive rates. There are also other types of mortgages with more flexibility for prepayments as well as convertible mortgages that can convert from open to closed at any time. An advisor can walk through each option in detail.

5. Types of mortgage insurance to consider

There are two considerations here: mortgage insurance and mortgage default insurance.

Mortgage insurance can protect your mortgage and ensure you and your family can stay in your home if you are unable to work due to a disability, involuntary job loss, critical illness, or in the event of your death. At CIBC, customers can choose the type of insurance that meets their needs and provides peace of mind.

Mortgage default insurance is required by the Canada Mortgage and Housing Corporation (CMHC ) if you make a down payment on your home of less than 20 per cent. There are three Canadian insurers to choose from: CMHC, Genworth Financial and Canada Guaranty.

In July, CMHC tightened the eligibility rules. Borrowers are now limited to spending 35 per cent of their gross income on housing, as opposed to the old 39 per cent; the minimum credit score needed is 680, up from 600; and down payments can no longer come from “non-traditional” sources, such as unsecured loans or credit cards.

Canada Guaranty and Genworth, however, haven’t adopted similar changes. “We’re very comfortable with the risk profile of borrowers and properties we’re insuring,” Mr. Charles says. “Canada Guaranty does make dynamic underwriting policy changes as market dynamics evolve.”

Work with professionals

Home buyers in general, but first-timers in particular, should seek out advisors — from real estate agents to banking and mortgage specialists — to ensure they’re making the right moves to meet their unique ownership needs.

Much of the home buying process is happening virtually today “and navigating some of this new environment goes back to using the right professionals,” says Christopher Alexander, executive vice-president and regional director at Re/Max Integra Ontario-Atlantic Canada.

As housing costs climb, some buyers may be tempted to cut costs by skipping professional help, which Mr. Alexander discourages.

“This is the biggest and among the most complicated transactions most people ever make,” he says. “Make sure you’ve got professionals on your side.”

Mr. Golombek says CIBC mortgage advisors are taking extra steps during the pandemic to work with clients remotely. From the first consultations to pre-approval and right up to closing, the entire process can be done remotely and online to ensure buyers stay healthy and safe during the house-hunting process.

Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.