What should your clients do with their ‘mortgage gap’ money?

When there’s a gap between the mortgage your client qualifies for and the one he actually gets, what should he do with the extra money? It’s a question posed by Garry Marr in the Financial Post.

Mortgage rules were tightened in October, requiring homebuyers to qualify based on the Bank of Canada’s posted rate for a five-year fixed-rate mortgage — currently 4.64%.

“Qualifying with that rate […] creat[es] a huge gap when it comes time to deciding how much you will actually pay, considering [homebuyers] can lock in a rate for as low as 2.28% for five years, according to ratespy.com,” reports Marr.

As an example, he shows the difference between two monthly mortgage payments, based on a loan for about $500,000 and a 25-year amortization period. A monthly payment at 4.64% is about $2,926, while a monthly payment at 2.28% is $2,278. The difference could be used to make prepayments according to your client’s mortgage terms, though the funds may be better deployed toward investments, for instance.

Read: Toronto homes prove too pricey for top 1%

Of course, another consideration is whether your client actually wants to buy a home based on the largest mortgage he can afford. A housing guide by Canada Mortgage and Housing Corporation suggests that monthly housing costs shouldn’t be more than 32% of your client’s average gross monthly income (the gross debt service ratio), even though clients with good credit and a reliable income could exceed those guidelines.

Read the full Financial Post article here.

Also read:

Explain CMHC’s mortgage loan premium hikes to homebuyers

The solution to Canada’s housing crisis

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.