When comparing mortgages from various lenders, you’ll likely notice some differences in the terms and mortgage amounts each lender offers you. While some factors are federally regulated like the mortgage stress test and interest rates, lenders will weigh elements like:
- your income and income type,
- down payment amount,
- credit score,
- property type and location, and
- current debt levels
These elements will be weighed differently based on your financial situation.
The Stress Test
First, let’s talk about the stress test. All federally-regulated lenders (like banks) must apply the mortgage stress test to incoming mortgage applications, which ensures you’ll be able to handle future rate increases and that you won’t borrow too much compared to your mortgage amount. You’ll need to be able to afford the greater number between either your contract rate + 2%, or the Bank of Canada qualifying rate (currently 5.25%). Basically, the stress test ensures that you can afford your mortgage at current rates, but also at potential future rates that could happen during your mortgage term. With the fluctuations in rates we’ve seen in recent years, the stress test has become an important, yet sometimes frustrating, part of the mortgage application process.
How Banks Calculate Mortgage Affordability
Generally speaking, big banks are more strict when it comes to calculating the affordability of a potential mortgage application than alternative lenders. They’ll require a strong credit score and favour applicants with traditional salaried income as opposed to self-employed workers, commission-based income, and applicants with variable or seasonal income. Consistency is key for big banks which can come with good rates, but can also result in a lower mortgage amount than you might be able to receive elsewhere if your financial situation isn’t sparkling clean or flexibility is a key factor. A mortgage with a bank is a great choice for many Canadians looking to purchase a home on the island; however it’s not the right move for everyone.
It’s also important to note that there are differences between how each big bank calculates affordability, so it’s well worth it to work with a mortgage broker and shop around for rates, even if you’re planning on taking a mortgage with a bank!
How Alternative and B Lenders Calculate Mortgage Affordability
At Auxilium Mortgage, we specialize in helping those who might not meet big banks’ strict criteria, find great mortgages, and get into the homes of their dreams. We have relationships with a wide range of lenders including big banks, but also including B lenders, alternative lenders, credit unions, and private lenders. This allows us to present a range of options to our clients and find the best mortgage that still works with their financial situation.
So how do alternative and B lenders calculate affordability, and how is that different from how banks operate? The premise of B lenders is to provide more flexible terms for mortgage seekers in exchange for higher interest rates and/or additional fees. Every lender wants to ensure that they can get their investment back, and B lenders are no different, they just specialize in “riskier” clients. (“Riskier” by bank standards — many clients who opt for a mortgage with a B lender still have great income and debt-to-income ratios!) There are many reasons to choose an alternative lender: a less-than-stellar credit history, income less consistent than a salaried job, higher debt levels, and even having a shorter credit history due to being new to Canada.
For many potential homeowners who are looking to purchase in more expensive markets like Victoria and elsewhere on Vancouver Island, the trade-off for a higher interest rate is worth being able to afford a larger mortgage.
Rental Income
Another factor we’ve talked about recently is how rental income can affect affordability. We won’t go into too much detail here (you can check out our other article where we go in-depth on the topic), but purchasing a property that already has a second suite or the potential for one that you plan to pursue can improve how much home you’re able to afford. Lenders look at this potential or current income as another revenue stream, which can end up having a significant impact on your approved mortgage amount if you’re planning on purchasing in a high-cost area!
Why Work with a Mortgage Broker?
On top of our access to a range of alternative and B lenders, a mortgage broker like Auxilium has access to preferential rates with many lenders, giving our clients an even larger edge than if they were to contact a lender on their own. When faced with various offers and options, we can help you weigh the importance of flexibility versus rate and other factors based on your unique financial situation. Our goal is to get you into the home of your dreams with the best mortgage for your situation, and affordability is just one piece of the puzzle!
If you’re interested in hearing more about working with a mortgage broker or the lenders we have access to, contact us today for a no-obligations consultation with a member of our Victoria-based mortgage team.