Mortgage interest rates and mortgage affordability are two critical factors that Canadian homeowners and buyers must consider when looking for the best mortgage. And let’s remember, ‘best’ is subjective and circumstantial.
Mortgage rates and mortgage affordability are not interchangeable terms. In other words, the lowest rate does not automatically equate to the highest affordability. Sure, a lower mortgage rate is more affordable, but in our industry ‘affordability’ usually translates to ‘purchasing power’ (aka. What’s the biggest mortgage I can get approved for?).
Understanding the difference between mortgage rates and mortgage affordability is essential when choosing the right mortgage for your home or investment. And trust us – affordability can often hold more weight than a lower mortgage rate, especially with home prices in Canada being as high as they are.
Lowest Mortgage Rates in Canada
In Canada – especially because of the cost of assets – we rely on credit to buy things like homes, cars, and other goods and services. Not all countries are as dependent on credit.
Mortgage rates are the annual interest rates that banks and lenders charge for borrowing money to purchase a home in Canada. Mortgage rates can fluctuate based on a variety of factors, including economic conditions, credit score, and the type of mortgage. It’s common knowledge now that borrowers with higher credit scores will qualify for lower mortgage rates, while those with lower credit scores will face higher interest rates.
There’s no doubt that mortgage rates will have a significant impact on your overall cost of homeownership. Even a small increase in interest rates can add up to thousands of dollars in extra interest charges over the lifetime of the loan (which in Canada is between 25-30 years). Therefore, most people shop around and compare rates from various banks to find the best possible deal – and they are right to do so. But while we get very caught up in securing the lowest possible interest rate, there is one factor that would outweigh the importance of the lowest interest rate. That factor is mortgage affordability.
Mortgage Affordability in Canada
Mortgage affordability refers to how much of a monthly mortgage payment you can comfortably afford based on your income, expenses, and other financial obligations – it also refers to your maximum ‘purchasing or borrowing power’. When calculating affordability, lenders will look at your debt servicing ratio (also referred to as debt-to-income ratios). Debt servicing is the percentage of your monthly/annual income that goes toward paying off debts, including the mortgage you’re requesting.
Debt servicing requirements will vary from bank to bank. In general, banks prefer borrowers with a TDS ratio of 44% or less, which means that your monthly mortgage payment should not exceed 44% of your monthly income. Again, this varies depending on the lender and the type of mortgage you are applying for (for example, credit scores below 680 might only qualify for a maximum of 42%, while B lenders might go as high as 60%).
It’s important to note that mortgage affordability is not just about the monthly mortgage payment. You also need to consider other expenses associated with homeownership, such as property taxes, home insurance, and property maintenance costs. These additional costs can quickly add up and affect your overall affordability. A mortgage broker can help you map out a budget to help plan for these costs.
To summarize, mortgage interest rates and mortgage affordability are two important factors to consider when shopping for a mortgage. Mortgage rates can significantly impact your overall cost of homeownership, while mortgage affordability determines your purchasing power. But remember, the lowest rate and the highest affordability do not go hand in hand. As controversial as this sounds, shopping around for the best mortgage might mean you have to sacrifice affordability – and vice versa.
Therefore, it is essential to talk to an experienced and reputable mortgage broker in Canada who has the patience and knowledge to help you understand the difference between the two, and to make an informed decision. Call us today at (905) 455-5005.