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Our mortgage rate tool has been designed with you in mind. By answering 5 questions in under 3 minutes you can find out what your specific mortgage rate is. The questions that we ask to help you determine what rate you qualify for are based on the same criteria that mortgage lenders use to determine what rate they will offer you. There are five vital pieces of information that a mortgage lender will get answered by having you complete a mortgage application. These criteria are often referred to as the “5 Cs of Credit,” being Collateral, Character, Credit, Capacity and Capital. Each of these criteria are discussed at length below.
Every mortgage lender will require you to complete an application form. Regardless of what that form looks like, or whether it is paper based or electronic, the lender needs the same information to be able to underwrite your application. Underwriting means that the mortgage lender is going to compare your answers to its list of criteria used to approve an applicant. It will then use this information to calculate the mortgage rate it will offer you. While most lenders offer similar mortgage rates, what they offer you will be different. Why? Because lenders generate their income from the interest that you pay to use their money. The more interest you pay, the more income they make.
No! Or at least not usually. They will often offer you their posted rate, which is the mortgage rate that they show to the public. That rate is higher than what they can ultimately offer you. In other words, they’ll start high, and the more you negotiate the lower they’ll go until they’ll hit their floor rate. That’s the rate that they can’t go below without making an exception.
Collateral refers to the security for the mortgage. The location, type of property and condition are all used to determine rates and fees. Generally speaking the types of collateral fall into one of the following categories: Owner occupied detached, semi-detached or townhouse This means that you intend on, or are living in the property and that it is a detached, semi-detached or townhouse. These types of properties are normally easy to sell because they’re in high demand. This is comforting for a mortgage lender because if it has to take over the property and sell it due to non-payment by the borrower it won’t have any troubles doing so. Owner occupied condominium With the same occupancy as the previous type, condominiums are also usually easy to sell because they’re in high demand. Of course this depends on the location and market demographics of the condominium. If the market is soft (there is some difficulty selling condominiums) then the lender may charge higher rates or have additional requirements for approval. Owner occupied rental property With the same occupancy as the previous types, rental properties become a bit more challenging. While great rates exist for these properties, lenders must be told that part of the property is being rented or the borrower may be in default of the standard charge terms (the terms of the mortgage). Non-owner occupied rental While great rates exist for these types of situations, the amount of the down payment is typically much higher than is allowed for an owner-occupied property. The law states that the home-owner must have at least 20% equity in the property or as a down payment when using a chartered bank. Of course an experienced mortgage broker deals with many more lenders than just the chartered banks, providing you with more choice and options than you’d be able to get on your own. Commercial property / farm / non-residential While possible to get approved, these types of properties aren’t your straight forward types of collateral. That means that more time and effort is required to get approved and get great rates. Luckily an experienced mortgage broker has both!
Capacity refers to your ability to make your payments based on your income. Lenders will use ratios of income to debt to calculate whether you fit their criteria. These ratios are called the gross debt service ratio (GDS) and the total debt service ratio (TDS). Gross Debt Service Ratio (GDS): The maximum ratio that is typical in the mortgage industry is 32%. This means that 32% of a potential borrower’s gross income may be used to service his or her shelter costs. The GDS has one main purpose: to determine if the proposed mortgage payment is within the lender’s maximum GDS ratio. The GDS is calculated using the following equation: GDS = [(PITH + ½ Condo Maintenance fee) / Gross Income] x 100 Total Debt Service Ratio Like the gds the tds is designed to determine if the borrower can afford the potential mortgage payment. However this calculation also includes all other debts that the borrower has. The TDS has two main functions. It can be used to: Pre-qualify the borrower by determining the maximum mortgage payment that the borrower can afford. Verify that the payment qualifies by determining if the potential mortgage payment falls within the lender’s TDS ratio. To pre-qualify a potential borrower it is necessary to determine the amount of a mortgage payment that he or she can afford based on the TDS calculation, and then use that payment amount to determine the maximum mortgage amount. Pre-qualifying a potential borrower based on the TDS is calculated by using the following equation: Maximum Mortgage Payment = (Income x Max TDS / 100) – (Property Taxes + Heat + ½ Condo Maintenance Fee + Other Debts) If the mortgage payment is known it’s necessary to determine if that payment meets the industry standard 40% tds ratio or whatever the ratio is for the lender we’ve chosen or are considering. This is calculated using the following equation: TDS = [(PITH + Other Debts) / Income] x 100 The lower the ratio the more financially comfortable the borrower will be, which in turn will result in the mortgage lender being willing to offer this borrower better rates.
Capital refers to your net worth and the equity you have in your property. Your net worth is calculated by taking all of the assets you have (remember that your house is an asset and the mortgage is a debt) minus all of the debts you have. If you own more than you owe, you have a positive net worth. If you owe more than you own, you have a negative net worth. Lenders prefer to have borrowers with a positive net worth. Lenders feel that you are less likely to go bankrupt if you own more than you owe and have equity in your property. That can result in better rates!
Character reflects on your financial character, not your personal character. For example, criminal records, divorce, etc are not used to determine character. Rather, information about job stability, net worth, previous bankruptcies, judgments, being behind on child support payments, etc. are used. Lenders get to know your financial character based on what they can see in reports and documentation. Lenders will start with the assumption that you are of great character, and change that assumption based on any information unearthed in the application process. That negative or derogatory information may have negative effect on the interest rate that the mortgage lender offers, meaning a higher rate! It’s important to deal with an experienced mortgage broker who knows how to handle this information and represent your interests to the mortgage lender.
When you borrow money information about your loan, credit card or mortgage is reported to Equifax or TransUnion, the two credit bureaus in Canada. When you apply for a loan, credit card or mortgage, the lender will check your credit report, viewing how you’ve paid others in the past to determine if you are likely to repay them. Your credit report will also have a credit score. How long you’ve had credit, your repayment history, amounts owing and other factors are all taken into account when the credit bureau calculates your credit score. The higher the score the more likely a borrower is to pay. The lower the score the more likely a borrower is to miss one or more payments. Therefore the higher the score the more likely you are to get the best rates possible, in combination with the previous criteria, of course. If you haven’t already done so please make use of our free online rate tool at to calculate your own personalized mortgage rate.