Most individuals that we connect with to discuss a Mortgage Pre-Approval also want to know how we can go about Increasing Your Purchase Power. More often than not, those individuals could afford to make mortgage payments. Usually, they already pay monthly rent in the same amount as a mortgage, or perhaps even more! Part of our process as Mortgage Brokers at GLM Mortgage Group is to connect with new clients with a Discovery Call, which involves key questions on important factors of a Mortgage Approval. We spend 10 minutes gathering information on income, credit, and down payment and with that, can provide a possible purchase price, and a piece of mind to shop within one’s budget. Sometimes at the end of the conversation, we find that an individual may not be able to purchase within the price range they had planned to and brings us back to the drawing board to discuss options and a gameplan for the future.
Now, the reason that someone may not qualify for a mortgage that they could afford payments on, is due to the Stress Test, which newest rules were released in June 2021 and decreased borrowing power by 25%. To pass the mortgage Stress Test, you need to qualify at the contract mortgage rate plus 2% or the benchmark rate of 5.25%, whichever is higher. The purpose of the Stress Test is to ensure that should interest rates rise – a borrower will still be able to afford their mortgage payment. This is a tactic by the Bank of Canada to ensure that consumers can withstand rising interest rates, as well as tackle household debt issues in Canada by preventing consumers from getting into further debt – but it greatly affects your purchase power, as you will qualify for less.
Now, there are a few options to consider, that can increase purchase power, potentially bypass the Stress Test and qualify for the purchase you are hoping to make. First, down payment – if you have 20% down payment, this can provide various options that will allow you bypass the Stress Test, which will increase purchase power. Local credit unions are provincially regulated and therefore can allow you to bypass the Stress Test, although this comes with a slight rate premium. Secondly, having a 20% down payment can also make Alternative Lending an option – but be sure you understand this, as it may be easier to qualify, but these interest rates will be higher and could cost you more in the long run. Nonetheless, with a 20% down payment – there are two viable options to increase your purchase power in the Pre-Approval stage.
Further advice that we share with new clients, when we find they may not qualify for what they hoped is bringing a Co-signor to the mortgage. This could be a friend or family member that will be on the mortgage with you, and on the title of the property as little as 1%. We would be able to factor their income, assets, and debts into the equation to increase the purchase power. The primary borrower is still responsible for making mortgage payments, but the co-signor is there as a back up, and is required to make payments should the primary borrower default.
Another solution to increase purchase power is to increase the down payment. This could mean putting your plans to purchase on hold for another 12 months while you continue to save, perhaps withdrawing RRSP or other Investments or even a gift from a family member may be possible. Given the current market conditions, we are seeing family members offer financial aid to their kids and grandkids to make home ownership possible for them.
Lastly, to increase purchase price, you can increase household income and decrease household debt. Although these options have a positive effect on purchase power, it takes time to see these effects take place. Perhaps obtaining a second part time job is possible, to increase income – but keep in mind, lenders will want to see this sustained for 2 years to consider the income. Also, decreasing debt will increase purchase power significantly. For every $14,000 of debt that we carry, or $400/month payment, our borrowing power is decreased by $100,000. If you have a significant down payment, it’s always more advantageous for qualifying, to use a portion to pay down debts.
At GLM Mortgage Group, we are with our clients for the entire journey. From the Discovery Call, we can identify client needs, any possible roadblocks, and a variety of solutions. Our brokers know how to Increase Your Purchase Power and know how to assess your unique situation, giving the right advice so you can best move forward in your plans to purchase a home.
