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Factors a Mortgage in Canada is Dependent On
When it comes to purchasing a home in Canada, there are 4 main factors that are going to make the largest difference on your mortgage approval. No matter what the mortgage amount is, you have to meet the requirements on each of these factors. Different lenders will have different minimum qualifications though so you can compare lenders to see if you can get a better rate or an approval if you weren’t approved the first time.
Down Payment
In Canada, the standard down payment required to purchase a home is 20% of the purchase price. That being said, though, if you are a first time home buyer, you can put down a minimum of 5% on a home purchase of up to $500,000. If the home costs more than $500,000 then you will have to put 10% on the remaining amount above. If you are purchasing a home above 1 million then you will have to put down at least 20%. You also have to put 20% down if you don’t intend to live in the home.
On a $300,000 mortgage, you would only be required to put down 5% which is $15,000. This amount will either have to be gifted to you with a gift letter or be sitting in your bank account for at least 3 months. Lenders also like to see that the amount has been slowly increasing over time instead of just a large deposit. Any large deposits may need to be explained to the lender.
Keep in mind that, while you only need $15,000 for the down payment, you will also be required to pay any escrow costs. Escrow costs vary depending on the purchase price of the home. They also include part of the yearly property taxes in these costs and those vary depending on where you live as well as the assessed value of the home.
Credit Score
When you are getting a mortgage, what credit score you need will depend on the lender. Most lenders like you to have a credit score sitting somewhere between 620-650 at a minimum, but a credit score of 700 is the ideal amount. If you do have a lower credit score, your credit history can make a large impact on your approval odds.
If you have chosen to give a down payment of less than 20%, this means you will need to get CMHC (Canadian Mortgage and Housing Corporation) loan insurance, also known as mortgage default insurance. This insurance covers up to 95% of the mortgage and protects the lender if you are unable to make your payments. Some lenders will require this insurance for first time home buyers even if they do put down the full 20%. If this insurance is required, their minimum required credit score is 680 so if you don’t have a credit score that high you will be unable to be approved for a mortgage.
Annual Income
Another big factor in the lender's decision is your annual income. This will determine whether or not you will be able to make your payments on your home loan. This amount also allows the lender to determine what the maximum mortgage amount that you can afford is.
Debt to Income Ratio
On top of everything else, mortgage lenders look at what your overall debt is as well as how those monthly debt payments correspond with your monthly income. When lenders are looking at these numbers, the payments they factor in are:
- Minimum credit card payments
- Minimum line of credit payments
- Monthly car loan payments
- Monthly personal loan payments
With debt to income ratios, lenders don’t want your monthly debt payments to exceed more than 40% of your monthly income. Some will let your DTI go as high as 50%. Keep in mind though that this percentage will include your new monthly mortgage payments. The reason that they like to keep it between 40-50% is because they know that you have more monthly expenses than what are included in your DTI, and it makes it less risky for you to default on the payments.
Annual Income Required for a $300,000 Home
The annual income required for a mortgage of this size really depends on your interest rate, what the loan insurance fee is and how much you are putting down. Let’s look at a few different scenarios.
With mortgage interest rates currently sitting around 5.65%, with no other debts and the minimum down payment you would likely need to make around $105,000 per year to purchase a home from $300,000. This has a lot to do with the stricter stress test rules and higher than normal interest rates.
If you take these same factors as above but add in monthly debt payments of $1000, then your approval amount now drops to $270,000. You would then likely need to make around $115,000 per year in order to be able to afford the same mortgage amount.
Keep in mind that interest rates are going to be slightly different depending on where you are intending to purchase your home. The housing prices are also going to look different so $300,000 will get you something different depending on where you choose to buy.
Mortgage Rates Per Province in Canada
While mortgage rates can vary per province, they mainly stay within the Countries average mortgage rates. The only factor that may sway mortgage rates a bit is the demand for housing in that province. If that is the case then the mortgage rates tend to stay within the same range.
Right now in Canada, mortgage rates are sitting around 5.62% for a fixed rate mortgage and 6.53 for a variable rate mortgage. That generally tracks all throughout Canada. As prime rates change though, the rest of 2023 may have different rates.
Monthly Payments on a $300,000 Mortgage
Figuring out the payments on a $300,000 mortgage isn’t as easy as we would like. Not only do you have to consider the interest rate and the down payment, you also have to consider the amortization period.
What is the amortization period? Well, this is how long it takes for the mortgage to be paid off in full. This time can range depending on the interest rate you are approved for as well as the amount of down payment you put down. In Canada, if you put down less than 20%, the longest amortization period you can get is 25 years.
While it may be confusing, the amortization period is different from the mortgage term. Mortgage terms normally range from 3- 5 years, even though the amortization could be 15, 20 or 25 years. This means that once your mortgage term is up you are going to have to refinance. Because anything can happen with interest rates, you need to keep this in mind when making the original purchase.
Let’s take a look at some monthly payments based on the different factors that affect mortgage payments. You will see below that the amortization period makes a big difference in how much interest you pay on the same loan amount. Keep in mind we are using monthly payments as an example, but there are other payment frequency options.
Amortization of 15 Years
| Housing Cost | $300,000 |
| Down Payment | 5% (15,000) |
| CMHC Insurance | $11,400 |
| Mortgage Cost | $296,400 |
| Total Interest Amount | $141,928.78 |
| Monthly Payment | $2,435.17 |
| Housing Cost | $300,000 |
| Down Payment | 20% (60,000) |
| CMHC Insurance | $0 |
| Mortgage Cost | $240,000 |
| Total Interest Amount | 114,922.90 |
| Monthly Payment | $1,971.79 |
Amortization of 20 Years
| Housing Cost | $300,000 |
| Down Payment | 5% (15,000) |
| CMHC Insurance | $11,400 |
| Mortgage Cost | $296,400 |
| Total Interest Amount | $196,341.58 |
| Monthly Payment | $2,053.09 |
| Housing Cost | $300,000 |
| Down Payment | 20% (60,000) |
| CMHC Insurance | $0 |
| Mortgage Cost | $240,000 |
| Total Interest Amount | $158,981.04 |
| Monthly Payment | $1,662.42 |
Amortization of 25 Years
| Housing Cost | $300,000 |
| Down Payment | 5% (15,000) |
| CMHC Insurance | $11,400 |
| Mortgage Cost | $296,400 |
| Total Interest Amount | $254,149.26 |
| Monthly Payment | $1,835.16 |
| Housing Cost | $300,000 |
| Down Payment | 20% (60,000) |
| CMHC Insurance | $0 |
| Mortgage Cost | $240,000 |
| Total Interest Amount | $205,788.07 |
| Monthly Payment | $1,485.96 |
Amortization of 30 Years
| Housing Cost | $300,000 |
| Down Payment | 20% (60,000) |
| CMHC Insurance | $0 |
| Mortgage Cost | $296,400 |
| Total Interest Amount | $255,162.64 |
| Monthly Payment | $2,053.09 |
Can You Pay Your Mortgage Off Early
In short, yes you can. It is a little more complicated than that though. How much extra you put on your mortgage or when you pay it off in full may come with a penalty depending on if you have an open or a closed mortgage.
Open Mortgage
Open mortgage means that there is no penalty for putting extra payments on your mortgage or paying it off early. Any extra payments you make will go directly onto the principle. That being said, they also affect your amortization schedule.
The amortization schedule basically states how much gets paid towards the principal and how much towards interest throughout the period of the loan. When you first start paying a mortgage the majority of your money goes towards the interest but as the principal balance lowers, less goes towards interest and more towards the principle.
If you have an open loan and start putting more money towards the principal, when you make your mandatory monthly payments more goes towards the principal and less towards interest. This can also affect your payment amounts when you refinance because your total mortgage amount will be lower than it was originally expected to be.
It is important to keep in mind though, that open mortgages are less common than closed mortgages. They also tend to have slightly higher interest rates because there are no penalties for the extra payments or paying off the remaining balance.
Closed Mortgage
A closed mortgage is a bit more complex. It really just depends on your mortgage contract when you can make the extra payments, how much you can pay per year as if you can pay off the whole mortgage in full without penalty.
Some mortgage models let you make a lump sum payment percentage per year. Others don’t let you at all. It's something you would want to discuss with the lender. Prepayment penalties vary since every lender has their own preferences. That being said, you are able to refinance or pay off your mortgage in full 120 days before the loan term ends.
