Creating mortgage eligibility

A RECENT Statistics Canada study shows an interesting home-ownership trend among young adults. It finds that young adults in rural and small towns are more likely to be homeowners than young adults in Canada’s metropolitan areas.

The study revealed that six of 10 Canadians aged 25 to 39 who did not live with their parents owned their own home in 2006. But the proportion of young homeowners was highest, at 71 per cent, among young people in this age group who lived in a rural area or in a small town.

By contrast, 54 per cent of those living in metropolitan Vancouver and 53 per cent of those living in Toronto owned their own home. The proportion fell to 48 per cent among those living in Montreal.

Price and affordability are just two of a number of factors that make home ownership more feasible for young people in small towns and rural areas, says Gary Siegle, Calgary regional manager with Invis. In addition to cheaper land and lower demand, the configuration of the housing stock also tends toward more affordable housing in rural areas.

"Small towns tend to have more starter homes," Siegle notes. "In the larger cities those types of homes tend to get gobbled up and redeveloped."

Some lenders are also changing the way they calculate mortgage eligibility. Borrowers have traditionally been required to meet certain standards on gross debt-service ratio and total debt-service ratio to qualify for a mortgage. Gross debt service is the ratio between what you earn and what you can pay each month for housing. Your monthly mortgage payment, taxes and heating costs were not allowed to exceed 32 per cent of your gross monthly salary. Total debt-service ratio calculates those same housing expenses, plus all other debt obligations, such as car payments, credit cards and student loans. This qualifying amount was no more than 40 per cent of your gross monthly salary.

But increasingly, lenders are extending the acceptable total debt service ratio to 44 per cent and dropping the gross debt service ratio qualification.

Longer amortization periods have put home ownership within reach of younger Canadians. The standard amortization of 25 years has been extended to 30, 35 and even 40 years.

"The difference in affordability between 25 and 40 years can be substantial," Siegle points out. A longer amortization, however, results in larger sums paid in interest over the long term.

"My own view is that it should be an entrance strategy and not a long-term strategy."

There is also the interest-only mortgage. You pay only the interest, and the principal remains unchanged for the term of the mortgage. With this product, you only build equity if the market value of the property increases.

Parents are increasingly stepping in to assist their children in buying their first home. That could be in the form of a gift for a down payment, and there are also programs in which the parents put their names on the title along with the children.

Building a credit profile is something every young person should do in preparation for applying for a mortgage, Siegle adds. Without a good credit history, lenders could deny your mortgage application or charge you a higher rate.

"Make sure you pay your bills on time, don’t max out; don’t go to your limit, let alone go over it," he adds. "A good credit score will take you a long way when you need a mortgage."

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