A lot goes into buying a home, especially if it is your first major investment. From finding the right location to discovering the best property you can call home, everything requires a lot of planning and assessment.

However, the most important aspect of buying a home remains knowing your purchasing power. If you plan to buy a home on a residential mortgage, you can call it your mortgage borrowing power.

This power determines how much you can borrow from residential mortgage lenders. A range of different factors influence this power, and you should know them to plan your property purchase accordingly.

Let us quickly understand what your residential mortgage borrowing power is and what it depends on.

What Is Residential Mortgage Borrowing Power?

Residential mortgage borrowing power is your capacity to borrow funds from a mortgage lender. You can also calculate it as the maximum amount you can borrow from a residential mortgage borrower.

Knowing your capacity helps you make informed and reasonable decisions. For example, if you ask for a residential mortgage in Toronto and you get only 70% of the property’s value you wish to buy, going ahead with the deal won’t be reasonable.

Your mortgage borrowing power gives you a reality check and ensures that you do not finalize far-fetched deals.

Which Factors Influence Your Residential Mortgage Borrowing Power?

The specific factors depend on the kind of mortgage you are looking for and the lender you work with. Here are the most common factors influencing your residential mortgage borrowing power:

Your Income:

Lenders are always interested in mortgage borrowers’ income. Your residential mortgage borrowing power increases if you have a stable and steady income.

Most lenders focus on your gross annual income before taxes while reviewing your application. They check your employment type (full-time or part-time), self-employment status (if you’re self-employed), passive income (if any), and all other sources of your income.

Ultimately, your borrowing power will depend a lot on how secure you make the mortgage lender feel about repayments.

Debt-To-Income Ratio:

Your debt-to-income ratio determines your capability to repay your mortgage based on your income. Residential mortgage lenders mainly focus on two ratios: gross debt service (GDS) and total debt service (TDS).

Your GDS is the ratio between your income and your housing expenses (property taxes, mortgage payments, utilities, etc.). It is expressed as a percentage of your income. An ideal GDS to increase your borrowing power should be below 40%.

Your TDS is the ratio between your income and all your debts, including car loans, student loans, credit cards, and more. It is also expressed as a percentage of your income.

Ideally, TDS below 45% is considered favorable and gives you greater borrowing power.

Your Credit Score:

A credit score is often the center of attention when it comes to conventional mortgage lenders like banks and credit agencies. This score reflects your creditworthiness as a borrower. It takes into consideration your credit history and determines your reliability.

Conventional residential mortgages often require borrowers to have credit scores above 680. Higher scores can get you lower interest rates, greater LTV (loan-to-value), and faster application approval.

However, you need not worry if your credit score is low. If you cannot meet the eligibility criteria of conventional lenders, you can contact private mortgage lenders. These lenders focus more on the property’s marketability than on your credit score. Such lenders also help borrowers with bad credit purchase residential properties.

Down Payment:

Mortgage lenders require a specific percentage of the principal amount upfront as a down payment. The minimum down payment in Canada is as follows:

• 5% for properties valued under $500,000
• 10% on the portion of your property valued between $500,000 and $999,999
• 20% on residential properties valued $1 million or more

You can increase your borrowing power by increasing your down payment. The more money you put down upfront, the more secure the mortgage will feel.

Mortgage Rates:

Existing mortgage rates have a strong influence on your borrowing power. Even small changes in these rates can disrupt your financial well-being.
For example, high mortgage rates increase your monthly expenses, reducing your overall borrowing power. On the other hand, low mortgage rates reduce your repayments, increasing your overall borrowing power.

How Can You Improve Your Residential Mortgage Borrowing Power?

Improving your borrowing power takes time. It is a slow and steady process that enhances your financial well-being.
Here is what you can do to improve your borrowing power before getting a residential mortgage:

Pay All Your Debts:

Be debt-free before getting your mortgage. Pay all your pending dues on time. This improves your credit score, ultimately giving you more borrowing power.

Boost Your Overall Income:

If you have an opportunity to get a higher-paying job, this is the time to get it! You can also increase your overall income by buying a property with your spouse, combining your income with theirs.

Make A Higher Down Payment:

If you can afford it, you should make a higher down payment to reduce your debt burden and improve your borrowing power. Many homebuyers save more, especially to increase their down payments.

Reduce Your Expenses:

Mortgage lenders review your financial statements before approving your mortgage application. High unnecessary expenses and low savings can reduce your borrowing power. Do your best to reduce your expenses to get a better mortgage deal.

The Final Word

Your residential mortgage borrowing power determines your capacity to borrow funds for your new house. Multiple factors influence this power, including your credit score, income, employment, savings, down payment, and more. Focus on the areas that matter the most and become financially savvy to improve your borrowing power.
Moreover, look for the best residential mortgage lenders that suit your requirements. If you cannot meet the conventional lending criteria, you can always approach private mortgage lenders without losing hope. They will assess your requirements and offer flexible mortgage deals that help you fulfill your dream of buying a home.