How to Get Pre-approved for a Larger Mortgage
Tuesday, 20 April 2021
Staying under budget when house hunting can be a difficult task. After finding the right home, and adding all your personal customizations, the final amount might be slightly higher than you expected. Here’s a quick guide on getting approved for a larger mortgage that will help you get everything you want in your home!
Make a Larger Down Payment
In Canada, every property purchase requires a minimum cash down payment, ranging from 5% to 20% of the purchase price. One of the most important factors in how big of a mortgage you can be approved for is the amount of your down payment. If you are purchasing a more expensive home, it will require a larger minimum down payment. The amount of down payment is one factor that is very much in your control.
Here are the minimum down payment rules in Canada:
• Homes under $500,000 = 5% down payment is required.
• Homes more than $500,000 but less than $1 million = 5% of the first $500,000 plus 10% of the remaining purchase price. (
• Home more than $1 million or more = 20% down payment.
For example, a $500,000 home only requires a 5% minimum down payment of $25,000. However, on a $800,000 home your minimum down payment will need to be $55,000 (5% of 500,000 + 10% of 300,000 = 25,000 + 30,000 or 55,000 total). This represents an effective rate of 6.9% overall.
Here is a mortgage calculator you can use to easily figure out what your minimum down payment is.
Increase Your Income
Increasing your income isn’t a quick or easy task, and switching careers probably isn’t an option you want to explore. Nevertheless, increasing your income will have a direct impact on the amount of money that you’re likely to be pre-approved for. Here are a couple of options you might want to consider:
• Look at your current salary and see if it is possible to negotiate for a higher salary. Have you been taking on additional work that could warrant a discussion about increasing your wages?
• Find a job or career that pays more. Check within your industry to find out if you are being paid adequately. If you find there is a discrepancy, and your employer declines to increase your wages, that may be a sign it’s time to find a new employer that places a higher value on your services. The downside however is that you will need to work at your new job for a while before applying for another mortgage – the stability of your employment is a major factor when banks approve you for a loan.
• Find additional sources of income. This could mean working overtime, renting out your spare room, or taking on a second job. An additional source of income will increase the mortgage amount you can be approved for.
An alternative to earning more money, is applying for the mortgage with a co-signer (for example, your parents) who also has a steady source of income. This is a simple way to help you get a larger mortgage.
Pay Off Debts
Besides your income, your mortgage provider will also look at your debt. They compare your income-to-debt ratio to determine how large a mortgage to approve. Paying down debt is just as important as proving stable income. Too much debt will offset the income to debt ratio and limit your ability to qualify for a larger amount.
To improve your debt-to-income ratio, you will want to pay off as much of your existing debts as possible, including credit card debts, car loans, student loans, and any other lines of credit that require ongoing payments.
Improve your credit score
Your credit score is just as important as your income and debt when it comes to getting the best mortgage rate. It’s a representation of how often you make your credit repayments on time, and how fiscally responsible you are with credit (loans). A high credit score tells the lender you are responsible with paying back loans on time, and less of a risk to lend to. The lower your credit score, the less likely a lender will lend to you, or it could mean a much lower amount than you expected.
Generally, most mortgage providers in Canada won’t lend to you if your credit score is less than 600. If your credit score is lower than 600, you may be referred to a “B lender” which often charge a much higher interest rate, resulting in higher monthly payments. Here are a few steps to keeping your credit score in check:
• Check your credit score regularly. You can request a credit report directly from TransUnion or Equifax. There are other apps like Credit Karma that notify you monthly when your credit score changes. Knowing your credit score is an essential starting point to determine what needs improvement.
• ALWAYS pay your bills in full, and on time, especially loan repayments. Late payments will directly impact your credit score. If you can’t make an upcoming payment, call your credit provider before the due date to arrange an adjustment to your payment schedule.
• Pro Tip: never go over 30% of your total available credit. This will demonstrate that you don’t rely on debt, and shows that you are using your credit responsibly.
Get a Lower Interest Rate
Not all lenders are the same. Shopping around and comparing different lenders is a must if you want the best rate. Not all mortgage providers assess risk the same way and some may offer a better rate based on the level of risk and profit margins. Do your own research and see which lender best fits your needs. Missing this step could cost you thousands of dollars over the term of the loan.
Another consideration is the terms and conditions of your mortgage and mortgage rate. Often times the small writing is more important than the big writing. Ask your mortgage provider to explain the terms of the agreement to ensure you aren’t paying unnecessary costs or fees.
Interviewing multiple lenders is a good place to start. Don’t always accept the first offer, instead use it as leverage to see if the next lender can match or beat it. These initial consultations are free, and they are able to provide insight and advice that’s personalized to your lending needs.
Use the tips above to prepare yourself prior to applying for a mortgage. By determining things like what is affordable and what you want from your home, you will be more prepared when having the initial talk with mortgage providers.
If you’d like to run some test numbers on how much you can afford, use this handy mortgage calculator. This will provide an estimate of your ideal mortgage amount based on your income, debt levels, purchase price, etc.