Realty Times: Canadians Shouldn't Take "No" for an Answer

September 28, 1999

Canadians Shouldn't Take "No" for an Answer
by PJ Wade

Too many Canadians forget that there's more to the world of finance than the Big Five Banks. Canadians are so programmed to think about banks when it comes to mortgages that some give up their real estate dreams if the bank turns down their mortgage application or offers them a smaller mortgage than they hoped for.

When one of Canada's Big Five Banks considers a mortgage application, they all want two questions answered:

#1. What is the borrower's ability to service the debt, that is, repay the amount borrowed "the principal" and pay the interest due on the outstanding balance?

Canadians banks set their Gross Debt Service (GDS) ratio at about 28% to 34% of your total before-tax income(s). This means that combined principal, interest and property tax payments must be less than about one-third of your allowable income. However, vulnerable income such as rent from an illegal apartment will probably not be accepted by banks, which may mean a smaller mortgage than you need.

#2. What is the lending value of the real property, that is, the price the real estate would sell for within a relatively short time, usually 60 to 90 days, even in a weak real estate market?

Lending value is a conservative estimate and not automatically equivalent to sale price. Be careful if you get caught up in a bidding war and pay a lot more than list price.

Even if you expect the bank to say "yes," you may want to consider the borrowing suggestions below:

Widen your search. That's just one bank, talk to the rest, too. Make sure you explore other financial insititutions, too - trust companies, insurance companies, credit unions...

Mortgage Brokers make it their business to find money Even though mortgage brokers often charge a fee, they may still be a cost-effective alternative:

Dealing in volume means they can often negotiate a better interest rate than you can with your one mortgage.
They shop commercial lenders and private investors to find you a good rate and more flexible qualification criteria, which saves you time as well as money.

Reach into your own pockets with The RRSP Home Buyers' Plan (HBP) Revenue Canada allows you to withdraw up to $20,000 from your registered retirement savings plans (RRSPs) to buy or build a qualifying home. Repayment can take place over 15 years. Contact Revenue Canada or your accountant to make sure you are clear on the complexities and the paperwork before you dive in.

Explore employment benefits. Check with your employer or human resources department to find out whether there is an employee mortgage program or a home-buying assistance plan. If your employer has a good relationship with a particular lender, reduced mortgage rates or other privileges may be possible for employees.

Explore seller financing. If the home seller intends to invest most of the proceeds of the sale, it may be possible to arrange some or all of the mortgage privately by offering the seller an attractive investment proposition.

Borrowing from relatives The success of this approach depends on your relationship with your family. Do insist on doing everything in writing for your sake and the lender's. Some intra-family mortgages are interest-free since interest is taxable income.

If you can't arrange the financing you need at a reasonable cost, rethink the purchase. You'll still have furnishings to buy, moving costs to pay and living expenses to cover. Stretching yourself to the financial limit can take the edge off home ownership.