Lenders take a number of factors into account when considering your mortgage application and determining the mortgage interest rates for your Regina home purchase.
Here are the main factors banks use to calculate your mortgage rate in Regina.
Down payment: The size of your down payment relative to the purchase price is one of the main factors that banks use to set mortgage interest rates. And, of course, the size of your down payment largely determines the size of your mortgage loan.
In Canada, you are required to make a down payment that’s between 5% and 20% of the home’s purchase price. The exact percentage depends on the price of the home. Here are the federal government’s rules governing the down payment amount:
- If the property is priced $500,000 or less: 5% of the purchase price
- If the property is priced $500,000 to $999,999: 5% of the first $500,000 of the home’s cost, and 10% for the amount of the purchase price beyond $500,000
- If the property is priced $1 million or more: 20% of the purchase price
Remember, if you decide to purchase a property with a down payment less than 20% of the home’s value, you will have to budget for CMHC mortgage insurance as well.
Debt service ratios: Along with your down payment amount, debt ratios are additional factors lenders consider when setting your mortgage interest rates. There are two main types of debt ratio you should know.
Gross debt service ratio (GDS): Your GDS ratio compares your housing costs to your income. To find your housing costs, lenders add up your mortgage payment (interest and principal), property taxes, heating costs and, if your home is a condo, half of the condo fees. Lenders will then divide this figure by your gross annual income to find your GDS ratio. Generally, lenders want to see that you spend no more than 35% of your income on housing costs to ensure you can pay back the mortgage loan.
Total debt service ratio (TDS): Your TDS ratio takes into account your housing costs plus other debts and compares that figure to your income. To calculate your TDS ratio, mortgage companies in Regina will start with your GDS ratio, then factor in other monthly payments you have to make. These might include credit card debt, personal loans and car loans. Lenders typically want to see a TDS ratio below 42% to ensure you have enough room in your budget to cover your mortgage payments.
Credit score: Your credit score is a number between 300 and 900 that tells potential lenders how safe or risky it might be to lend you money. This is based on your borrowing and repayment history on your credit report. A higher credit score means you appear to be more creditworthy, which could help you qualify for the lowest mortgage interest rates for your Regina home purchase. Lower credit scores reflect missed payments and other problems lenders may have had with lending you money in the past, or a lack of experience with loans. Since a lower credit score means it could be riskier to lend you money, this means banks could set mortgage rates for your Regina home higher. Lenders have different minimum credit score requirements, but most require a score of at least 600. If you need to buy CMHC mortgage insurance, CMHC requires a minimum credit score of 680. (Remember, you will need CMHC insurance if your down payment is less than 20% of the property’s purchase price.)
Employment and income: Lenders will want to get a picture of your regular income and where it is coming from, whether that’s a salaried job, self-employment, rental income or investments. If you are self-employed, lenders will ask for more documents. These could include your tax returns from the previous three years, articles of incorporation, your business’s credit score, business license or GST license, proof that you are a principal owner of the business, Notice of Assessment from the Canada Revenue Agency showing you are up to date on HST and GST payments, client contracts showing expected future income, and your business’s financial statements.