A recent survey has shown that household spending has skyrocketed, particularly in Alberta. We spoke with one of First Foundation's licensed mortgage brokers, Jennifer Huynh, to find out how a jump in household spending could affect someone looking for a mortgage in the near future.
Huynh stated that one of the more common pitfalls that potential homeowners can fall into is the purchase through financing of a high-value vehicle, such as a nice pickup truck or a sports car. "An $80,000 vehicle can mean a payment of more than $1000 a month", Huynh said, "and this can make a big difference when calculating debt load."
Huynh counsels potential homeowners to hold off on financing of high-dollar vehicles until after they've secured the mortgage, or to purchase them with cash or a higher down payment that will reduce monthly payments to a more reasonable amount. If you already have a mortgage, purchasing a vehicle on a home equity line of credit keeps it off your balance sheet.
"When we're looking at credit cards or lines of credit, we calculate 3% of the balance owing per month as the monthly payment, where a monthly payment on a vehicle is entered as the actual dollar amount being paid," says Huynh. This means that if you do have to make a larger household purchase while trying to position yourself for a mortgage, you are much better off doing it on a credit card or line of credit than entering into a financing arrangement.
The Formulas Used to Calculate Your Mortgage
By far the most important formula used to calculate what you can afford for a mortgage is your Total Debt Service (TDS) ratio. This is the percentage of your gross income before deductions used to pay housing costs and debt. Housing costs include property tax, heating bills, and of course mortgage payments. Debts include all debt, including lines of credit, credit cards, vehicle financing, and any other debts you owe. The Canadian Mortgage and Housing Corporation (CMHC) has set the TDS guideline at 40%, however there is a little wiggle room for clients with superior credit. Ultimately, the lower you can keep your TDS, the more purchasing power you have.
The other ratio is the Gross Debt Service (GDS) ratio, which is the percentage of your gross income required to pay your housing costs, including all of the items mentioned above. This ratio is less important to lenders if you have superior credit and little to no outside debt. CMHC has set the GDS guideline at 32% or N/A for clients with credit scores above 680.
Want to know your credit score? Contact us anytime, we can help you secure your bureau from Equifax!
Keep Household Spending Low and Pay Down Credit Debt
First Foundation mortgage brokers don't just try to find you the best deal on a mortgage, they act as credit counsellors and will tell you exactly what you need to cut back on or what accounts you need to pay down to qualify for the amount you are looking for. Listening to their advice can save you tens of thousands of dollars over the lifetime of your mortgage, and it's certainly worth waiting even a year to rehabilitate your finances according to their instructions to save that money. The key to keeping the TDS ratio low is to reduce your monthly payments. This can be done by curtailing household spending and focusing on paying down your highest interest debt first.
Contact First Foundation today for more advice on the best way to qualify for a mortgage!