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.
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.