If you are looking for a mortgage on a home purchase with the best mortgage rates on the market, you will have to qualify based on certain criteria. Credit scores, debt service ratios, and the stress test are all part of getting a mortgage. The ratios we use to qualify applicants include the gross debt service ratio ("GDS") and the total debt service ratio ("TDS"). The GDS takes your mortgage payment, property tax obligation, heating costs and strata fees if applicable and measures it against your monthly income. That percentage of your income used to service those payments can't be more than 39%. The TDS includes the payments above along with other monthly payments such as car payments, credit card payments, student loans, etc and that total can't be more than 44% of your income. The mortgage payment used for debt service calculations are estimated using either the Bank of Canada benchmark rate or your contract rate plus two percent depending on your mortgage product and down payment. How does all that factor into your home buying decisions? The benchmark price of a single family home on Vancouver Island was $504,500 in January 2019 and there is a certain amount of income you would need to be earning to purchase that home.
For an accurate estimate of income required, we would need to know exactly what your monthly liabilities are and the specific amount of property taxes on a particular home. What we can do however is give you a ballpark figure to start with and get a general sense of housing affordability on Vancouver Island these days by using general estimates. For example, to estimate property taxes and heating cost, we will be using $100-$120 per month for heating costs and 0.75% of the home value for property taxes. Other monthly liabilities such as credit cards, student loans, or car payments can further affect affordability but for the purposes of this estimate, we are focusing on the minimum income requirement.
In order to afford a home priced at $504,500, your household income would need to be between $90k with 20% down and $106k with the minimum down payment. Not all home buyers are positioned in those income brackets and single-family homes may be out of reach for now. The good news is that there are other choices available. The next two tables show the benchmark price for townhomes and apartments. To analyze affordability for these property types, we also have to factor in strata fees. Typically, the older the property the higher the strata fees but for the purposes of this analysis, we will be using $250 for our estimates. Mortgage lenders generally only use 50% of the strata fees for debt service calculations and we will be too.
To purchase a townhome with a benchmark price of $407,600 in January 2019 with the minimum downpayment, you would need to be earning $89k and with 20% down your annual household income would need to be $77k.
The benchmark price of an apartment on Vancouver Island was $318,800 in January 2019 and your minimum income would need to range between $71k with a 5% down payment and $62k with a 20% downpayment.
Bank of Canada 5-yr Bond Yield
There is a strong correlation between mortgage rates and the Bank of Canada ("BoC") bond yields since both attract similar investors. The current 5-yr bond yield plus a percentage point spread, typically 1%-1.2%, helps set mortgage rate pricing for a 5-yr fixed rate. Mortgage products are priced higher because they are slightly riskier investments than government bonds.
Bank of Canada Prime Rate
The prime lending rate (3.95% at present) is what banks offer as their very best rate on a variety of loans. Typically, the prime rate is the BoC overnight lending rate, plus approximately 2%. Variable rate mortgages are priced at a discount off of the prime rate. Lines of credit on the other hand are the prime rate plus a premium.
Bank of Canada 5-yr Benchmark Rate
The benchmark qualifying rate (currently 5.34%) is set by the Bank of Canada based on a survey of conventional or posted 5-yr rates available at Canada’s major banks. This rate is also applied to stress test mortgage applications.
The estimates provided above are based on the most recent real estate benchmark price data available from the Vancouver Island Real Estate Board which covers areas north of the Malahat and competitive lending rates available for 5-yr fixed rate terms amortized over 25-yrs.
1. The minimum down payment for home purchases at $500,000 and under is 5%. For homes between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000 and 10% of the remaining balance. For homes with a purchase price of $1 million and more, the minimum down payment is 20%.
2. Mortgage default insurance is mandatory in Canada for purchases with down payments of less than 20%. There are three providers of mortgage default insurance and they are The Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, and Canada Guaranty. CMHC is a federal Crown corporation, while both Genworth and Canada Guaranty are private insurers
If you would like to request a region specific and personalized mortgage analysis with different terms and rate structures, please send an email to balraj@themortgagemaan.ca or call the office at 250-591-5556 to schedule an appointment. The above information is believed to be true and correct at the date of publication. However, changes in circumstances after the time of publication may impact on the accuracy of this information and therefore should not be relied on without verification.