In today’s post, I’ll be going through on some mortgage fundamentals so you can better answer the all important question: How can I get a bigger mortgage loan?
Before we start going into the details, I would be remiss if I didn’t take this opportunity to clarify a common misconception about mortgages. The mortgage is not the loan! The mortgage is the legal agreement between the borrower and the lender. As the borrower, you grant the lender a mortgage in exchange for a loan.
With that aside, let’s discuss the 6 major mortgage loan drivers: income, expenses, amortization, term, interest rate, and down payment.
Income is, arguably, the most crucial factor behind all mortgage loan calculations. This is one part of the equation that needs very little explanation.
Takeaway: A higher income translates to higher loan amounts. Make more money! Easier said than done, right?
Expenses offsets your income and may include projected property taxes, strata fees (for stratified properties), hydro costs, credit card payments, car loans payments etc.
Takeaway: Lower expenses translates to higher loan amounts.
The amortization period is the time period it will take to repay the entire mortgage loan in full. 25 year amortization is common but may be extended to a maximum of 35 years (conditions apply).
Takeaway: Longer amortization period translates to higher loan amounts (but also a higher total lifetime cost).
The mortgage term is the length of time, usually in years, that the borrower commits to the mortgage conditions such as the interest rate. At the expiration of the term, the outstanding balance of the mortgage loan will need to be paid off in full, renewed, or refinanced.
Takeaway: Shorter term translates to lower interest rates which in turn means higher loan amounts.
The interest is the amount of money paid to the lender for the funds loaned. This will often be expressed as an annual or semi-annual percentage of the outstanding loan amount. Many factors affect the interest rate but it generally boils down to a combination of perceived risk to both the lender and borrower.
For example, as the lender, if the borrower has a poor credit score the apparent risk translates to a higher interest rate. Conversely, as the borrower, you’re often choosing between a variable or fixed interest rate. A variable interest rate is cheaper because it is more risky than a fixed rate.
Takeaway: Lower interest rate translates to higher loan amounts.
A down payment is the upfront payment when purchasing property. Home buyers making a down payment less than 20% of the purchase price will be required by lenders to obtain mortgage loan insurance.
Takeaway: Higher down payments translates to lower risk to the lender which in turn means lower interest rates for higher loan amounts.
If you’re a future home buyer, there are adjustments you can do today to increase your mortgage loan tomorrow. If you’re a currently in the market for a new home, there are adjustments that you can discuss with your mortgage broker so that you can get that higher mortgage loan. Knowing these 6 drivers are key to understanding how you can increase your mortgage loan!
Suggested Reading: Read about the Mortgage Stress Test and how it’ll affect you!
Is there a topic that you’d like me to discuss further? Leave me a comment below!