Unimor Capital Corporation

Tag: affordability

  • Unlocking Mortgage Affordability

    Unlocking Mortgage Affordability

    As a trusted mortgage broker serving the vibrant city of Windsor, I understand the importance of helping prospective homebuyers determine their mortgage affordability. Buying a home is a significant financial commitment, and understanding how much of a mortgage payment you can afford is crucial for long-term financial stability. In this article, we will explore the rules of home affordability, discuss how your monthly payment is calculated, and shed light on other factors to consider when determining your affordable mortgage payment.

    The Rules of Home Affordability: Before diving into mortgage calculations, it’s essential to understand the rules of home affordability that guide borrowers:

    • Gross Debt Service (GDS) Ratio: The GDS ratio is the percentage of your gross monthly income that can be allocated toward housing costs. It includes mortgage payments, property taxes, heating expenses, and half of any condo fees (if applicable). Lenders typically prefer a GDS ratio of 35% or lower.
    • Total Debt Service (TDS) Ratio: The TDS ratio encompasses all your debt obligations, including housing costs, credit card payments, car loans, and other loans. Lenders generally recommend a TDS ratio of 42% or lower to ensure you can manage your overall debt load.
    • Mortgage Stress Test: Since 2018, borrowers in Canada must undergo a mortgage stress test. This test assesses your ability to manage your mortgage payments at a higher interest rate than the one you will actually receive. The minimum qualifying rate is the greater of the Bank of Canada’s five-year benchmark rate or the contract rate plus 2%.

    Calculating Your Monthly Mortgage Payment: To calculate your affordable monthly mortgage payment, follow these steps:

    1. Assess Your Financial Situation: Begin by evaluating your income, including stable sources such as employment, self-employment, or investments. Take into account your monthly expenses, including debts and other financial obligations. This assessment provides a clear picture of your financial health.
    2. Determine Your GDS & TDS Ratios: Calculate your GDS and TDS ratios by dividing your monthly housing costs and total debt obligations, respectively, by your gross monthly income. Ensure that your GDS ratio remains at or below 35% and your TDS ratio at or below 42% to meet lender guidelines.
    3. Consider Your Down Payment: Determine the amount you can allocate for a down payment. In Canada, a minimum down payment of 5% is typically required, but a higher down payment can lead to lower monthly payments and potential cost savings over the long term.
    4. Factor in Interest Rates & Terms: Consider prevailing interest rates and loan terms. Your mortgage broker can provide you with up-to-date information on interest rates and assist you in selecting the most suitable loan term for your financial goals.
    5. Include Additional Costs: When determining your affordable mortgage payment, consider other expenses related to homeownership. These may include property taxes, home insurance, maintenance costs, and potential condo or strata fees. These additional costs will affect your overall affordability.

    Other Considerations for Mortgage Affordability: While calculating your monthly mortgage payment is a crucial step, it’s essential to consider the broader financial context. Here are a few key factors to keep in mind:

    • Emergency Fund: Building and maintaining an emergency fund is vital. Unexpected expenses can arise, and having a financial cushion will provide peace of mind and ensure you can comfortably manage your mortgage payment even during challenging times.
    • Future Goals & Lifestyle: Consider your long-term goals and lifestyle when determining your mortgage payment. Assess how homeownership fits into your plans, such as career growth, starting a family, or other major life events. Balancing your mortgage payment with other financial aspirations is crucial.
    • Homeownership Costs: Remember that homeownership comes with additional costs beyond the monthly mortgage payment. These may include utilities, home maintenance, renovations, and potential increases in property taxes. Evaluating these costs will help you estimate the overall financial responsibility of owning a home.
    • Seek Professional Guidance: As a Mortgage Broker, I strongly advise seeking professional guidance throughout the homebuying process. A knowledgeable mortgage professional can help you navigate the intricacies of mortgage affordability, assist with pre-approval, and provide personalized advice tailored to your specific circumstances.

    Determining how much of a mortgage payment you can afford is a vital step in achieving your homeownership dreams. By adhering to the rules of home affordability, calculating your GDS and TDS ratios, and considering your down payment, interest rates, loan terms, and additional homeownership costs, you can establish an affordable monthly mortgage payment. Additionally, evaluating factors like emergency funds, future goals, and homeownership expenses will contribute to a well-rounded financial plan. As an experienced Mortgage Broker, I am here to provide expert guidance and support throughout your homebuying journey, ensuring you make informed decisions for a bright and financially secure future.

  • Ways to Finance a Home Renovation

    Ways to Finance a Home Renovation

    Ways to Finance a Home Renovation

    With the pandemic keeping more of us at home, for more hours of the day, about a fifth of homeowners have their eye on a renovation in the near future. The big question for many is: What’s the best way to pay for it?

    Since the COVID-19 pandemic entered our lives, Canadians have been spending a lot more time at home—and in many cases, it’s inspired both indoor and outdoor renovation projects. New consumer research suggests 23% of Canadians have completed a renovation in the past year and an additional 21% are considering a renovation in the near future. The shift to backyard visits may have made a new deck or freshly landscaped patio more appealing, and in some cases, remote work or virtual school has highlighted the need for a space that functions as a home office. Others are noticing overdue cosmetic updates or are using this time to complete repairs around the house.

    While these home renovations are often necessary, and some are even exciting, most Canadians don’t have the means to pay for these projects outright. 25% of Canadians have saved money during the pandemic as a result of reduced spending on dining out, entertainment, clothing and commuting costs. Families in this fortunate position are using newfound space in their budget to create emergency savings, invest or pay down debt or to help fund a large purchase. Even with these savings in hand, however, Canadians will need to borrow at least part of the cost of their planned reno projects. The big questions for many are: What are the options available? And which is the best for them?

    Can you afford to finance your reno?
    Generally speaking, it’s okay to borrow money for a renovation as long as you can adequately service the debt it creates. This means understanding how the interest rate and repayment structure of your loan will impact your finances. What will the monthly payment be on a $30,000 loan or a $50,000 line of credit, for example, and can you afford to add that to your budget?

    With so many borrowing options available from your bank and other lenders, if you have a steady income, you’ll likely have access to some form of credit. However, that doesn’t necessarily mean you should go for it. If you don’t qualify for a secured loan or line of credit, you probably shouldn’t do the renovation. Getting turned down by a lender reflects your credit history, debt, income, and other factors—including the size and affordability of your project. You may want to consider scaling back the renovation or holding off until you’ve saved up a larger proportion of the cost.

    Home Equity Line of Credit (HELOC)
    A home equity line of credit, commonly referred to as a HELOC, is a revolving line of credit that is secured by the equity in your home. Nearly all banks and credit unions offer this type of lending, and because a HELOC is secured to your home, interest rates are significantly lower when compared to unsecured loans and lines of credit.

    Homeowners can typically borrow up to 80% of the appraised value of their home minus the amount owing on their mortgage. For example, if your house is worth $750,000 and you owe $300,00 on your mortgage, you would be able to borrow up to $300,000 on a HELOC. Interest payments are structured, but otherwise, the homeowner is able to move money in and out of the line as they please. Most major financial institutions offer interest rates based on the lender’s prime rate (for example, prime +1%).

    Once you’re approved, the funds can be used for anything you choose: a renovation, a new car, unexpected expenses. Many homeowners opt to set up a HELOC with their lender just to have credit available immediately if needed. However, this type of credit can be dangerous if you’re prone to overspending or bad at setting boundaries. As you make payments back to the line, that credit becomes available again, allowing you to re-borrow funds. If you are only making the minimum payment each month—usually just the interest owing on the amount you’re currently using—while you continue to draw additional funds from the line of credit, your debt can skyrocket. It’s best to use a HELOC for planned expenses only and avoid using it for discretionary spending or filling gaps in your monthly budget.

    If you’re worried you may overspend on a HELOC, ask your lender to set a limit you’re comfortable with. Just because you get approved for the maximum amount doesn’t mean you have to take it. So, if you only need half of what they’re offering, ask them to meet you there.

    Refinancing your Mortgage
    When you refinance a mortgage, you’re adding to the amount of money you borrowed from a bank or other lender to purchase your home. This new amount is then rolled into balance on your mortgage. This means you won’t have a separate loan or line of credit payment to deal with—it’s all covered by your mortgage payment. Mortgage refinancing is more structured than a HELOC, this is an attractive option for many homeowners and often has the lowest possible interest rate, because it’s a first mortgage that is secured by the equity in your home.

    Refinancing a mortgage is a great option for those with a tendency to spend, as there’s less need for discipline, you get a lump sum loan, to cover the cost of your renovation and the repayment is fixed. You can’t really abuse that money and you can’t get extra.

    If you add to your mortgage principal, you will owe more and, subsequently, you could have a higher monthly payment. However, if you add to the loan while locking into a lower rate, you may actually end up with a lower monthly payment (yes, even if you’ve borrowed more money). For example, if you originally owed $450,000 on your mortgage at 4% interest with an amortization of 25 years, your monthly payment would have been $2,375. If you added a $100,000 loan at the time of your mortgage renewal and locked into a lower rate of 1.8%, you’d owe $100,000 more but have a monthly payment of $2,278—slightly lower than your original monthly mortgage payment.

    Unsecured Personal Loan or Line of Credit
    A personal loan is a lump sum that you’ll repay with interest on a set schedule. A personal line of credit operates like a HELOC, with a limit you will continually regain as you repay the funds borrowed, but at a higher interest rate because it’s not secured to your home. The interest rates on personal loans and personal lines of credit are typically similar.

    While this type of credit may come in handy in an emergency, it isn’t ideal for planned renovation expenses. Not only do these options come with much higher interest rates than secured forms of credit, but you will also likely have access to less money, which limits what you can do.

    However, if you find yourself in a bind, an unsecured personal loan or line of credit with a reputable financial institution can be helpful. If you can pay it off quickly, it’s better than using a credit card. But it’s not inexpensive or ideal for the average person. While the interest rate on a HELOC may be the lender’s prime rate + 1%, interest on a personal loan might be anywhere from 6% to 12% or more, depending on the lender and terms, as well as your personal credit rating and existing debt load. The interest rate on a standard credit card will likely be 19% or higher.

    The bottom line? In an emergency, a personal loan can be a lifesaver, but it isn’t ideal for most homeowners and should not be used for discretionary spending.

    What else should you be thinking about when borrowing funds for a home renovation?
    A renovation can cost a lot of money, but it typically adds value to your home—something to consider if you have plans to move in the near future. If you’re borrowing money on a HELOC or other form of credit to renovate, your home’s value should go up, if you’re selling, this could be a great investment. But if you’re not selling, you still have to pay it back. Real estate value aside, a home renovation can bring a lot of personal satisfaction and improve your quality of life.

  • Tips for Reducing the Overall Cost of Your Mortgage

    Tips for Reducing the Overall Cost of Your Mortgage

    Should You Pay Off Your Mortgage Early

    When you get your first mortgage, it’s hard for many people to focus on the end game, especially given that so many people put so much effort into saving up the minimum down payment, or even making use of grants or various cash-back programs that some lenders offer. It’s important that you keep all your options on the table so that when you’re ready to focus on your long-term strategy, your mortgage allows you to take action, whatever that may be.

    Option #1: Start smart and maximize your down payment.
    While it’s possible to get away with only putting 5% to 10% down on a home purchase, the single biggest cost-cutting measure you can do is to maximize your down payment. Not only will you owe less, reducing the overall interest you pay, but you’ll avoid having to pay mortgage loan insurance premiums—a fee buyers pay for the privilege of putting less than 20% down on a home.

    Option #2: Buy what you can afford.
    It sounds simple. Buy a home that fits your budget; the reality is when it comes to buying a home most of us struggle. On one side we want our dream home. On the other is the desire to be fiscally smart. Quite often, it’s a trade-off. But if you focus on buying within your budget (not the maximum mortgage amount your bank has agreed to lend you, but the mortgage that works with your financial plan), then you’re less likely to dip below the 20% down payment, and more likely to stick to your plan of paying off the debt sooner.

    Option #3: Shop for the best rate.
    Buying a home is stressful. Quite often, buyers will stick with banks or financial institutions they know. But when shopping for the best mortgage rate, it’s actually better to cast your net wide and far. Consider credit unions, as quite often these institutions can offer much better rates and terms than some major banks.

    Option #4: Pay attention to when interest is charged.
    Most standard mortgages in Canada charge interest semi-annually—that means twice a year the lender calculates what interest you owe, based on the outstanding principal debt and the accumulated interest on that outstanding debt. This is known as semi-annual compounding interest (compounding because it’s interest on interest). The rate at which compound interest grows depends on the frequency of compounding, the higher the frequency, or the number of compounding periods, then the greater the compound interest. For that reason, a loan with a 10% interest rate, but compounded annually, will actually accrue less interest than a loan with 5% interest that is compounded semi-annually, over the same time period.

    Option #5: Accelerated payments.
    When finalizing your mortgage consider going from one monthly payment to accelerated payments. This adds two extra payments per year, which reduces your principal debt just a tad bit faster.

    Option #6: Lump sum or extra payments.
    But the real key to paying off your mortgage debt faster is to get a mortgage that allows you to make extra payments. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of principal, without extra fees. These extra payments go directly towards paying down the principal. If possible, however, try and avoid mortgages that only allow you to make extra or lump sum payments on the mortgage anniversary—as this can reduce the likelihood of the extra payment.

    Option #7: Lower your amortization.
    Those who want to pay off their mortgages sooner should choose the shortest possible amortization. While typical amortization periods are for 25 years, you can opt for as short as 10 years or as long as 30 years (if you made a down payment of 20% or more on your home). Forcing yourself to pay off the mortgage in fewer years translates into lower interest costs and substantial savings. The hitch? Your regular monthly or accelerated payments will be much higher.

    Option #8: Increase your regular payments.
    To give yourself the best of both worlds, consider going with a longer amortization, but increasing your regular payments using your mortgage loan prepayment privileges. For instance, if your monthly mortgage payment is $1,000 you could increase this to $2,000 per month if your loan terms allowed for double-up payments. In effect, you would be paying off a 20-year mortgage in just 10 years. Better still, you’d have the flexibility to switch back to the lesser regular monthly payment if you were to experience any changes like a sudden job loss or the birth of a child.

    In the end, the answer as to whether or not you should pay off your mortgage early really boils down to what’s important to you in both your short-term and your long-term financial plan.

     

  • Understanding GDS & TDS: What Can You Afford?

    Understanding GDS & TDS: What Can You Afford?

    When shopping around for a mortgage, there’s more to think about than simply finding the best mortgage rates. It’s important to also consider the terms and conditions of your mortgage, the size of your down payment, and whether or not you can afford the home (and monthly mortgage payments) you’re considering.

    While there are handy tools like a mortgage affordability calculator to help you figure out what you can afford, it’s a good idea to understand how lenders calculate your affordability and the formulas they use to do so.

    There are two standard measures of affordability lenders use to determine how much they’ll lend you. First, your Gross Debt Service Ratio (GDS) is calculated. This is the percentage of your income needed to pay all monthly housing costs: your mortgage, property taxes, heat, and 50% of your condo fees (if applicable). The industry standard for GDS is 32%, meaning you typically need a GDS lower than 32% to qualify for a mortgage.

    Calculating your GDS

    GDS = (Principal + Interest + Property Taxes + Heating + ½ Condo Fees) / Gross Income x 100

    Next, a lender will calculate your Total Debt Service Ratio (TDS), which is similar to a GDS but also takes into account your other monthly debts, like credit card payments, car payments, alimony, and loans. The industry standard for TDS is slightly higher than GDS at 40-42%.

    Calculating your TDS

    TDS = (Principal + Interest + Property Taxes + Heating + ½ Condo Fees) + Other Debts) / Gross Income x 100