Bigpacific's Sunshine Coast

Is it easy these days to qualify for a mortgage?

These days, it’s not so particularly easy to qualify for a mortgage. You have to have your down payment, a good income and a strong credit record resulting in a high credit “score”.

Lower mortgage rates help qualify you for a larger mortgage loan. Because the payments will be lower, you could actually borrow more money and purchase a more expensive property.

Some go as far as to say that lower mortgage rates not only help qualify you for a larger mortgage loan but also indirectly help drive up real estate prices because people can afford more.

Banks look at everything before deciding if you will qualify for a mortgage loan. Basically, everything has to line up before the underwriter will approve the loan.

First of all, the bank will want to make sure that you can afford to pay back the loan. They have a formula for that. Only a certain percentage of your income can go towards debt payments. This makes sense because you got to eat too – along with a bunch of regular or irregular expenses. The banks do not see any benefit in getting you into financial trouble. That may be partially because they are genuinely concerned about your well-being. It may also be because bad loans tend to strike back hard on the bank and its reputation.

The notion that low interest rates help to shore up property values is not a particularly popular one - but there is substantial evidence that there is a reverse connection.

A LOWER RATE, YOU CAN GET MORE MONEY

Smart people have already figured out that they’ll qualify for a bigger loan when the interest rate is lower. Your mortgage payments, being made up of principal and interest portions, will be smaller when the interest rates are lower. Therefore, you can borrow more money.

About a year ago, the government put a stop to that for those that seek to maximize their mortgage loan. One cannot take the cheapest rate on the rack any longer to “make” the loan work. One has to take the “qualifying rate”. The logic behind this is that any loan will need to be renegotiated after a few years (often 5 years) – and then the rate may be much higher. In fact, everybody in the financing business expects rates to go up in a few years – not down. This is why the government imposed the “qualifying rate” on new mortgage applications.

Mortgages with variable rates or fixed terms under three or five years typically require that you qualify at the “qualifying rate”.

For example, if you apply for a 2.25%, 5-year variable mortgage, the lender might make you qualify at their posted 5-year rate (5.39% for example). If you can afford the “regular” high rate, then you’re deemed an excellent candidate for the bargain rate.

Lenders then use the qualifying rate to calculate your debt service rations. They check that your debt ratios are low enough to meet their guidelines.

In times of extremely high interest rates, property values tend to be under downward pressure because many people can't afford the payments any longer.

STILL BENEFITING FROM LOW RATES

It’s still true that lower mortgage rates will result in lower mortgage payments. That logic will never change. However, you won’t be able to borrow as much any longer, in certain cases. Here are a few things to keep in mind:

Your payments are based on the contract rate (the rate you are quoted), not the qualifying rate.

All insured variable and 1- to 4-year fixed mortgages over 80% loan-to-value must be qualified using the posted 5-year fixed rate.

Some lenders also apply the Bank of Canada qualifying rate to uninsured mortgages, and mortgages with a loan-to-value of 80% or less.

Other lenders allow lower qualifying rates if the loan-to-value is 80% or less (they may use a 3-year discounted fixed rate instead of the posted 5-year fixed rate).

Some banks have recently lowered their qualifying rates for conventional (up to 80%) mortgage loans. This makes it easier for borrowers to qualify for variable and 1- to 4-year fixed mortgages.

None of these qualification rate changes affect high-ratio insured mortgages, which are regulated by the federal government. High-ratio variable and 1- to 4-year fixed mortgages are still qualified at the big banks’ median posted 5-year fixed rate.

What we have noticed is that the spread between the posted rates and the discount rates may be shrinking. This makes a bit of sense because nobody pays these posted rates – so why market them?

If you are a wealthy person, you can borrow a lot of money, particularly when you don't need it. If you are a pauper, no loans will be available to you. Try explaining this to an outsider!

OTHER LENDING CRITERIA

Apart from looking at your income, banks will also look at the applicant’s character. They pull a credit report and can extract a host of information on a person’s credit history. Obviously, when you’ve shown responsible borrowing behaviour, the banks will be more likely to work with you than when you’ve been skipping payments or shown other financially destructive habits.

Banks also like to look at collateral. If you own much (stocks, real estate, other assets), you are more likely to qualify than when you have very little. Part of this picture might be the valuation of the property that you’re wishing to put up against the mortgage loan: an appraisal will clear this hurdle.