Advice for Living Through These Uncertain Times
Lisa Manwaring • May 27, 2020
It only takes a quick trip to the grocery store to realize that life is VERY different than it was just a couple of months ago. COVID-19 has already left a permanent mark in modern human history. So as you continue life mid-pandemic, here's some good advice: don’t believe everything you read on the internet or see in the news.
As it relates to your personal financial situation.
As it relates to the Canadian economy.
As it relates to the value of your home.
As it relates to Canadian real estate values.
Because as the media continues to cover COVID-19, you can expect to see financial doomsday headlines; designed to grab your attention, get more outlandish as time goes on. The goal is to catch your eye with a wild headline so that you read an article (or watch a video) and are exposed to the advertisements contained within.
Media and news companies are in the business of selling advertisements, not providing you with accurate unbiased information.
The best way to grab your attention is with an attempt to instil fear or shock. One headline will read that house prices are expected to plummet, the next will claim mortgage defaults are on the rise by a billion per cent, while the next will provide incredible proof that house sales are expected to grind to a screeching halt and will never return to normal.
And although most of these stories contain *some* level of truth, rest assured that what may be true for the rest of Canada (or the US) is not necessarily true about your personal financial situation, your local economy, your local real estate, or your mortgage.
Don’t buy into the hype and get anxious about things you can’t control.
It might be best to just turn off the TV, put down the newspaper, and stop scrolling Facebook. Especially if you aren't thinking of making a move anytime soon anyway! But if your mortgage is up for renewal, if you're thinking of buying a new property, or if you're looking to make a change with your investments, then it's best to talk with local professional and seek their advice!
Be influenced by those who have your best interest in mind!
If you have any questions about your mortgage, please don’t hesitate to contact me anytime. I’d be more than happy to let you know exactly where you stand.
RECENT POSTS
One of the major qualifiers lenders look at when considering your application for mortgage financing is your debt service ratios. Now, before we get started, if you prefer to have someone walk through these calculations with you, assess your financial situation, and let you know exactly where you stand, let’s connect. There is no use in dusting off the calculator and running the numbers yourself when we can do it for you! However, if you’re someone who likes to know the nitty-gritty of how things work instead of simply accepting that's just the way it is, this article is for you. But be warned, there are a lot of mortgage words and some math ahead; with that out of the way, let’s get started! “Debt servicing” is the measure of your ability to meet all of your financial obligations. There are two ratios that lenders examine to determine whether you can debt service a mortgage. The first is called the “gross debt service” ratio, or GDS, which is the percentage of your monthly household income that covers your housing costs. The second is called the “total debt service” ratio, or TDS, which is the percentage of your monthly household income covering your housing costs and all your other debts. GDS is your income compared to the cost of financing the mortgage, including your proposed mortgage payments (principal and interest), property taxes, and heat (PITH), plus a percentage of your condo fees (if applicable). Here’s how to calculate your GDS. Principal + Interest + Taxes + Heat / Gross Annual Income Your TDS is your income compared to your GDS plus the payments made to service any existing debts. Debts include car loans, line of credit, credit card payments, support payments, student loans, and anywhere else you’re contractually obligated to make payments. Here’s how to calculate your TDS. Principal + Interest + Taxes + Heat + Other Debts / Gross Annual Income With the calculations for those ratios in place, the next step is to understand that each lender has guidelines that outline a maximum GDS/TDS. Exceeding these guidelines will result in your mortgage application being declined, so the lower your GDS/TDS, the better. If you don’t have any outstanding debts, your GDS and TDS will be the same number. This is a good thing! The maximum ratios vary for conventional mortgage financing based on the lender and mortgage product being offered. However, if your mortgage is high ratio and mortgage default insurance is required, the maximum GDS is 39% with a maximum TDS of 44%. So how does this play out in real life? Well, let’s say you’re currently looking to purchase a property with a payment of $1700/mth (PITH), and your total annual household income is $90,000 ($7500/mth). The calculations would be $1700 divided by $7500, which equals 0.227, giving you a gross debt service ratio of 22.7%. A point of clarity here. When calculating the principal and interest portion of the payment, the Government of Canada has instituted a stress test. It requires you to qualify using the government's qualifying rate (which is higher), not the actual contract rate. This is true for both fixed and variable rate mortgages. Now let’s continue with the scenario. Let’s say that in addition to the payments required to service the property, you have a car payment of $300/mth, child support payments of $500/mth, and between your credit cards and line of credit, you’re responsible for another $700/mth. In total, you pay $1500/mth. So when you add in the $1700/mth PITH, you arrive at a total of $3200/mth for all of your financial obligations. $3200 divided by $7500 equals 0.427, giving you a total debt service ratio of 42.7%. Here’s where it gets interesting. Based on your GDS alone, you can easily afford the property. But when you factor in all your other expenses, the TDS exceeds the allowable limit of 42% (for an insured mortgage anyway). So why does this matter? Well, as it stands, you wouldn’t qualify for the mortgage, even though you are likely paying more than $1700/mth in rent. So then, to qualify, it might be as simple as shuffling some of your debt to lower payments. Or maybe you have 10% of the purchase price saved for a downpayment, changing the mortgage structure to 5% down and using the additional 5% to pay out a portion of your debt might be the difference you need to bring it all together. Here’s the thing, as your actual financial situation is most likely different than the one above, working with an independent mortgage professional is the best way to give yourself options. Don’t do this alone. Your best plan is to seek and rely on the advice provided by an experienced independent mortgage professional. While you might secure a handful of mortgages over your lifetime, we do this every day with people just like you. It’s never too early to start the conversation about mortgage qualification. Going over your application and assessing your debt service ratios in detail beforehand gives you the time needed to make the financial moves necessary to put yourself in the best financial position. So if you find yourself questioning what you can afford or if you want to discuss your GDS/TDS ratios to understand the mortgage process a little better, please get in touch. It would be a pleasure to work with you, we can get a preapproval started right away.
Thinking of Buying a Home? Here’s Why Getting Pre-Approved Is Key If you’re ready to buy a home but aren’t sure where to begin, the answer is simple: start with a pre-approval. It’s one of the most important first steps in your home-buying journey—and here's why. Why a Pre-Approval is Crucial Imagine walking into a restaurant, hungry and excited to order, but unsure if your credit card will cover the bill. It’s the same situation with buying a home. You can browse listings online all day, but until you know how much you can afford, you’re just window shopping. Getting pre-approved for a mortgage is like finding out the price range you can comfortably shop within before you start looking at homes with a real estate agent. It sets you up for success and saves you from wasting time on properties that might be out of reach. What Exactly is a Pre-Approval? A pre-approval isn’t a guarantee. It’s not a promise that a lender will give you a mortgage no matter what happens with your finances. It’s more like a preview of your financial health, giving you a clear idea of how much you can borrow, based on the information you provide at the time. Think of it as a roadmap. After going through the pre-approval process, you’ll have a much clearer picture of what you can afford and what you need to do to make the final approval process smoother. What Happens During the Pre-Approval Process? When you apply for a pre-approval, lenders will look at a few key areas: Your income Your credit history Your assets and liabilities The property you’re interested in This comprehensive review will uncover any potential hurdles that could prevent you from securing financing later on. The earlier you identify these challenges, the better. Potential Issues a Pre-Approval Can Reveal Even if you feel confident that your finances are in good shape, a pre-approval might uncover issues you didn’t expect: Recent job changes or probation periods An income that’s heavily commission-based or reliant on extra shifts Errors or collections on your credit report Lack of a well-established credit history Insufficient funds saved for a down payment Existing debt reducing your qualification amount Any other financial blind spots you might not be aware of By addressing these issues early, you give yourself the best chance of securing the mortgage you need. A pre-approval makes sure there are no surprises along the way. Pre-Approval vs. Pre-Qualification: What’s the Difference? It’s important to understand that a pre-approval is more than just a quick online estimate. Unlike pre-qualification—which can sometimes be based on limited information and calculations—a pre-approval involves a thorough review of your finances. This includes looking at your credit report, providing detailed documents, and having a conversation with a mortgage professional about your options. Why Get Pre-Approved Now? The best time to secure a pre-approval is as soon as possible. The process is free and carries no risk—it just gives you a clear path forward. It’s never too early to start, and by doing so, you’ll be in a much stronger position when you're ready to make an offer on your dream home. Let’s Make Your Home Buying Journey Smooth A well-planned mortgage process can make all the difference in securing your home. If you’re ready to get pre-approved or just want to chat about your options, I’d love to help. Let’s make your home-buying experience a smooth and successful one!
