Yeah. Part One.

Mortgages are quite the animal, so there’s a lot to know before you dive right into one. They’re also not super exciting, so it’s probably for the best that we split it up. We don’t need anyone giving up 2000 words in when we touch on collateral for the 8th time.

I figure we’re best to start with how to determine what we’ll qualify for, and then get into manipulating & expanding that number if your budget doesn’t suit your must-have list in Part Two.

With real estate prices climbing ever higher, seemingly across the board, the Conservative government under Finance Minister Jim Flaherty made an array of changes to artificially cool the housing demand in 2012, reducing the risk of a bubble and simultaneous crash as seen south of the border. Despite it being against traditional Conservative financial policy to tamper with free markets, the government implements these new measures and made home ownership more difficult for first-time buyers and others alike.

The argument, naturally, is that the consumers affected by these changes likely shouldn’t have been buying properties anyway, since their situations were associated with higher risks of defaults and foreclosures. Personally, I feel these situations are better assessed on a person-to-person basis in terms of who can adapt their situations and survive rate hikes or reductions in income. At the same time, you have to respect the government applying the same rules to everyone, though it hurts people who otherwise could’ve managed.

In determining how much you can afford to spend on a home, lenders typically focus on two main ratios. Gross Debt Service, or the amount of the liabilities tied to your home, is currently capped at 39%. This means that the amount of your proposed mortgage payments plus your condo fees (if applicable), property taxes, and utilities should not exceed 39% of your household income. Total Debt Service, the more critical number, is also capped at 44%.This includes the aforementioned GDS components, but also any other personal liabilities you may have. Student loans, credit card debts, lines of credit and car loan payments are the most common additional charges in the TDS calculation. Typically a lender will look for these ratios to be at 32% at 40% respectively, which can be increased to the maximum based on high credit scores. We’ll address those in part two.

A major reason I feel the Flaherty changes were unnecessary is due to the little known benchmark, or qualifying rate. If you’ve never bought a home before, chances are you’ve never heard of this number, the one that likes to deflate expectations for new mortgagors. Here’s a tip: If you’re looking into properties to purchase and you use the mortgage calculator on a website/app like Realtor.ca, use the benchmark interest rate to qualify yourself, as that’s what your lender will be forced to use as well. Even though your ratios may be strong at an interest rate of 2.5% on a 5 year variable rate mortgage, you’ll have to have favourable GDS & TDS ratios based on the higher rate. The benchmark rate, which is the 5-year term fixed posted rate (currently 5.34%) is in place to protect against rate hikes, effectively the same thing Flaherty’s changes were put in place to do.

Once you’ve established what you believe you can afford, the process of choosing your actual mortgage begins. Comparison shopping is essential, and one of the best ways to do this is through a mortgage broker. Ben Melick of Mortgage Intelligence (Kitchener-Waterloo), Randy von Heyking of Mortgage Alliance and Rob Campbell of the Mortgage Wellness Group (Guelph) are all stand-up options for you to consult. It’s not even a bad idea to consult with one before you try and figure out what you can afford. They’ll help you through it. Mortgage brokers understand each product available and can point you in the direction of the product that’s right for you. If you already do all your banking and investing with the same major bank, they could also be a good option for you, since that can typically give you some leverage either for mortgages or other services. They’re not always the lowest rates, in fact they’re usually not, but at least you can be comfortable in having a one-stop shop for your finances and they can easily be managed all at once. That said, if you’re indifferent between loyalties to a bank and trying a mortgage broker, watch this CBC Marketplace episode (Segment 2, about 5 minutes) on big bank mortgages and go from there. It should help you make up your mind.

In Part Two we’ll look at credit scores: how they’re calculated, their impact and how to improve them; various types of incomes and how lenders view them; co-signers, which more and more of us have; mortgage insurance and high-ratio premiums vs. low-ratio mortgages. Let’s be honest though, mortgage posts can only be so long.