As lenders review your mortgage application, they take several factors into account as they decide whether to approve it, and if so, what mortgage interest rates to offer you.
Here are the main factors lenders use to calculate your Moncton home mortgage rate:
Down payment: The size of your down payment affects both the size of your mortgage loan and the mortgage rates you will be offered. Lenders generally offer the lowest Moncton mortgage rates when homebuyers make larger down payments relative to the cost of the home. In Canada, homebuyers have to make a down payment of at least 5% to 20% of the home’s purchase price. The federal government sets some additional rules about the size of the down payment you need to make based on the home’s cost:
- For a home valued at $500,000 or less: 5% of the home’s cost
- For a home valued at $500,000 to $999,999: 5% of the first $500,000 of the home’s cost, and 10% for the portion of the home’s cost above $500,000
- For a home valued at $1 million or more: 20% of the home’s cost
Remember, if your down payment is less than 20% of the home’s cost, you will need to budget for the required CMHC mortgage insurance.
Credit score: Another important factor lenders look at when setting mortgage interest rates for your Moncton home purchase is your credit score. Credit scores can range from 300 to 900, with higher scores indicating a stronger credit history (more experience using credit, as well as a positive payment history, among other factors). Financial institutions set their own minimum credit score requirements for mortgage loans, but most major Canadian lenders require at least a 600. CMHC's minimum credit score to provide mortgage insurance is 680, so you will need to clear this figure if your down payment is less than 20% of the purchase price, triggering the mortgage insurance requirement.
Employment and income: Mortgage lenders want to know what income you will use to make payments on the loan, so they will ask for information about your income sources and amounts and your employment history. You should include any investment and rental income along with paychecks from your job. Banks usually see full-time and longer-term employment as less risky than part-time work and self-employment. These factors in addition to the size of your paychecks may help you qualify for your Moncton mortgage loan as well as cheaper mortgage rates. If you are self-employed, you will need to provide additional documents describing your business and its finances. Lenders may ask for three years of tax returns, the most recent Notice of Assessment from the Canada Revenue Agency showing you don’t owe any back HST or GST payments, the business articles of incorporation and proof you are a principal owner in the business, your GST or business license, your business’s credit score and other records, like a cash flow statement, balance sheet and client contracts showing projected future income.
Debt service ratios: Along with the size of your down payment, credit score, employment and income, mortgage companies in Moncton will also consider two other factors when setting your mortgage interest rates. These are called debt ratios for short and there are two different types.
Gross debt service ratio (GDS): This is the percentage of your income that goes toward your housing expenses. Lenders generally want to see that you spend 35% or less of your gross annual income on housing costs to ensure you can afford to pay back your mortgage loan. When calculating your GDS figure, lenders include in your housing costs your monthly mortgage payment, heating costs and property taxes. If your home is a condo, they also count 50% of your condo fees.
Total debt service ratio (TDS): The TDS ratio adds together all the housing costs from your GDS ratio plus your other monthly debt payments. These might be for personal loans, auto loans or credit cards. Lenders divide this total by your gross annual income to calculate your TDS ratio. They typically want to see a TDS ratio below 42% to feel comfortable that your budget can accommodate your mortgage loan payments.