Becoming a homeowner is a dream for many, but achieving this goal may require strategic adjustments in your finances. Discover five key strategies to increase your borrowing capacity and make it easier to access homeownership.
Strategy 1: Stabilize and increase your revenue
The first crucial step in building your mortgage affordability is to stabilize and, if possible, increase your income. Job stability is not only important for your credibility with lenders, but it also helps build a solid financial foundation.
By looking for promotion opportunities at work, you not only increase your income but also demonstrate your commitment to your career. Promotions often come with a pay raise, strengthening your financial position to borrow. Keeping a job for several years is a key element that adds to your financial credibility. Ideally, for salaried employment, a stability of at least one year is recommended, while for commission or seasonal jobs, a period of more than two years may be more advantageous.
Considering additional income opportunities can also be an effective strategy. This can include side projects, independent consultations, or investments that generate passive income. However, make sure that these additional activities don't add instability to your main income.
Strategy 2: Improve your credit score
Your credit score is a key issue for your borrowing capacity. It’s what opens, or closes, the door to attractive interest rates and favourable loan terms. So, how to increase your credit score? To boost your score, start by carefully reviewing your credit report to identify and correct any potential errors. Then, focus on concrete actions to strengthen your position as a strong borrower.
The first step is to make sure you pay your bills on time. This demonstrates your financial responsibility and contributes positively to your credit history. Additionally, reduce your credit usage as much as possible, as high usage can negatively impact your score.
An additional practical tip is to wait before opening new credit accounts, such as car loans or home appliance loans. This caution avoids significantly increasing your monthly repayment amounts, thus preserving your financial capacity.
In addition, make all your credit payments on time and in full. This applies to various aspects of your financial commitments, such as car loans, car rentals, student loans, credit cards, and lines of credit. Timely payments not only help maintain your current rating, but can also increase it gradually.
Strategy 3: Maximize your down payment
Maximizing your down payment is an essential strategic step when buying a home. How you approach this step can have a significant impact on your overall mortgage and your long-term financial outlook.
There are different strategies for approaching the down payment for a home, condo, duplex, or triplex, each with its distinct advantages. The higher your down payment, the lower your mortgage amount will be. This approach reduces the amount of interest paid in the long run. However, it is also possible to put down a smaller amount, with the minimum usually set at 5%, and invest the rest wisely.
20% strategy: Avoid CMHC insurance:
Putting 20% of the total cost of the house as a down payment has a considerable financial advantage. This eliminates the need to pay for CMHC mortgage default insurance, reducing your overall costs and increasing your borrowing capacity. This strategy is particularly suitable for those who can manage a larger initial down payment.
5% strategy: Liquidity and long-term investments:
Opting for a 5% down payment can be a smart strategy to maintain greater liquidity while accepting a higher mortgage. This approach offers the opportunity to invest excess capital in long-term investments, aiming for a potentially higher return than the cost of borrowing. However, this involves larger monthly payments and the cost of CMHC insurance.
Choosing between these two strategies depends on your financial goals and risk tolerance. A higher down payment reduces the burden of a higher mortgage, while a lower down payment can provide greater flexibility and investment opportunities. Carefully assess your financial priorities and consult with a mortgage expert to determine the best approach based on your personal situation.
Increasing your down payment can greatly affect your borrowing capacity, but it's crucial to find the balance that best meets your needs and long-term financial goals.
Strategy 4: Ease your financial burden by reducing your debt
Reducing your existing debts is a concrete way to optimize your borrowing capacity. Understanding the concept of debt-to-income ratio can help you navigate this process more effectively.
The debt-to-income ratio explained:
The debt-to-income ratio is a metric that assesses how much of your income is spent on paying off your debts. The lower the ratio, the more lenders consider you to have financial leeway to support a mortgage. In other words, a low debt-to-income ratio makes you more attractive to lenders.
Reduce high-interest debt first:
Establish a repayment plan with a focus on paying off high-interest debts first. These debts accumulate interest faster, increasing the total financial burden over time. By reducing these debts faster, you save on interest and improve your overall financial situation.
Develop a personalized repayment plan:
Take the time to establish a repayment plan that is tailored to your situation. This may involve additional payments on priority debts, debt consolidation, or even negotiating lower interest rates with your creditors. A financial advisor can help you develop a realistic plan based on your financial goals.
Strategy 5: Choose the right time and the right institution, and opt for a mortgage broker
Choosing the right time to buy a home and the right financial institution is crucial, but using the services of a mortgage broker can be an added asset in your quest to maximize your borrowing capacity with an institution.
Mortgage brokers are professionals in the financial sector who act as intermediaries between borrowers and lenders. Their expertise can be valuable to you for several reasons. First, brokers often have access to a wide range of financial products, which means they can help you find the mortgage that best suits your needs and financial situation.
In addition to their in-depth knowledge of the market, mortgage brokers can also negotiate with lenders to obtain more advantageous terms. This can result in lower interest rates, lower fees, or other benefits that can significantly influence your borrowing capacity.
Working with a mortgage broker can also save you time. Instead of contacting multiple lenders individually, the broker can do this for you, simplifying the process and allowing you to focus on other aspects of your real estate purchase.
It's crucial to take the time to shop around for your mortgage broker. Not all brokers offer the same services or benefits. Consult with multiple brokers, ask for references, and make sure they understand your financial goals. Opting for a knowledgeable and reliable broker can make a huge difference in your ability to secure a great mortgage.
By combining these strategies, you’ll strengthen your financial position and increase your chances of getting a good mortgage. This makes home ownership a more accessible reality.
