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Readying Yourself for Carrying a Mortgage

11 October 2012

Buying a home is an exciting venture that requires a great deal of financial preparation. Homebuyers that are not financially ready for a Canadian mortgage can end up defaulting on payments, falling into debt, and even losing their homes. Luckily, there is a guide you can use to make sure you are prepared to carry a mortgage. Before applying for a home loan, you can organize your finances by:

  • Looking into your credit history and credit score
  • Determining an affordable price range for your new home
  • Choosing a mortgage product that suits your budget

And by ensuring that all your finances and budgeting needs are in order beforehand, you could save yourself thousands of dollars on your loan by getting a better rate, paying less interest, and paying your mortgage off faster.

Examining Your Credit History Before Applying for a Mortgage

One of the most influential factors that will impact your mortgage approval and the subsequent interest rate is your credit score. The better your score, the lower your interest rate will be. To be eligible for prime or sub-prime rates, you will need a credit rating of 750 or higher. If your rating is not quite there, take a few months to improve it, which you can do by:

  • Reducing your debts
  • Paying bills in a timely manner
  • Avoiding inquiries into your credit history (as each inquiry from a creditor will negatively affect your rating)
  • Clarifying any inaccurate information on your credit bureau

Calculating Your Affordable Home Price

To determine the amount you can afford for your home, there are three main factors to look at:

  • Loan-to-value (LTV) ratio
  • Debt-to-income ratio
  • Annual salary versus the home price

If you take your annual salary and multiply it by 2.5, that number will give you a good basis for home affordability. To determine your debt-to-income ratio, calculate all your monthly expenses and divide the number by your monthly income. If your debts are around 30% of your income, you are starting from a good financial position.

Lastly, if the LTV ratio on your mortgage is higher than 80%, your interest rate will be much higher–and consequently your regular payments–and you might want to consider a home that costs less, or saving up a larger down payment.

Finding the Right Mortgage Product

When choosing a mortgage product, one of the basic decisions you will face is picking a fixed or variable rate mortgage. While a fixed rate mortgage will have a constant interest rate, it will likely be higher than with other mortgage products. On the other hand, a variable rate mortgage might offer a lower interest rate, but could increase with the market rate at any time. Even a slightly lower interest rate could save you thousands of dollars during the course of paying down your mortgage, and the mortgage product you choose today will have a lasting influence on your budget.

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