Before we start, this article is not going to show you anything illegal, fraudulent – nor how you can game the system to get a bigger mortgage.
However, there is a well known method whereby you can qualify for a larger mortgage amount – we are not talking massively higher amounts but definitely something to think about and consider, particularly if you’re near the top of the range for what kind of home you can afford.
MORTGAGE QUALIFICATION RULES AND HOW MUCH MORTGAGE YOU CAN AFFORD
If you are sitting there thinking ‘How Much Mortgage Can I Afford?’ then the answer is ‘It Depends’. What it depends on, among many other things, is what type of mortgage rate you are interested in – fixed or variable.
And, in a nutshell, the way that you qualify for a higher mortgage is to take a 5 year fixed rate mortgage.
You see, the rules that lenders use to assess a 5 year fixed rate mortgage are completely different to those that they use for every other mortgage type (variable and 1-4 year fixed rate).
This is one of the reasons why the 5 year fixed rate mortgage is the most popular in Canada.
Let’s explain what’s going on…
HOW EXACTLY DOES THIS WORK?
When you apply for a mortgage or a mortgage pre-approval, lenders use something called a ‘qualifying rate’. Basically, this is a rate that they use to see if you can afford the mortgage.
What you probably didn’t know was that for a 5 year fixed rate mortgage, they use the actual mortgage rate where as for every other mortgage type they use a different, much higher rate.
The higher rate they use is called the Bank Of Canada Qualifying Rate and is currently (as of early 2016) 4.64%.
So to get a mortgage – regardless of what the rate available is – you must first prove that you could afford a mortgage at a 4.64% rate. Except for if you are trying to get a 5 year fixed rate.
So you have to prove you can afford a mortgage at 4.64%, in order to get a variable rate or 1-4 year fixed rate mortgage.
This is very important, as the amount of mortgage you can afford is very different at 4.64% compared to under 3% (where 5 year fixed rates are just now).
When you apply for a 5 year fixed rate mortgage, you only need to prove you can afford a mortgage at that actual rate – around 2.5-2.9% currently.
WHY THE DIFFERENCE?
When you think about it, the difference actually makes sense. When you get a 5 year fixed rate mortgage, your rate is locked in for 5 years and if you can afford it just now, it is likely that you will be able to afford it for all 5 years.
For any other mortgage – whether it be 1-4 year fixed rate or variable rate – it is highly likely your rate will change within 5 years and there is a chance you might not be able to afford that change. So they ‘qualify’ you at a higher rate to ensure you can.
OK, SO DO I JUST TAKE THE 5 YEAR FIXED RATE? WHAT’S THE CATCH?
There is no catch in terms of how the above process works.
The real catch is looking beyond the mortgage rate being offered as there are many other factors to consider – and 5 year fixed rate mortgages tend to be where lenders bury the highest hidden costs.
For example, the penalty costs on some 5 year fixed rate mortgages can be unbelievably high – $20,000 and upwards! For more on this, make sure and check out our free guide at: http://www.GTAMortgagePros.com/bank-mortgage-rates
In reality, selecting the right mortgage product for your situation is much more complicated than people think. This is where a mortgage professional – such as the mortgage agents from Dominion Lending Centre Edge Financial – can help.
Best of all, any advice you get is completely free as, in the vast majority of cases, you pay them absolutely nothing (only in cases of extreme bankruptcy or very badly bruised credit are there any fees).
Check out our free Toronto mortgage broker service.
If you have any questions about how any of this works, feel free to reach out to us at:
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