Does Refinancing your Mortgage Benefit you?

“Should I refinance my mortgage?” is a very common question. But the better question is, “Does refinancing your mortgage benefit you?” If you can answer this question, you can answer the original question.

Refinancing your mortgage either significantly benefits you (i.e. your debt payments decrease, you have more cash available to spend, etc.) or it does not. It’s that simple.

In this post, I am going to show you an example of what can happen when you refinance your mortgage. Once you see the numbers, you can ask yourself, “Does this benefit me?” Then you’ll be able to answer, “Should I do it?”

Refinance Calculator

Before we begin the example, note that the refinancing calculations below were all done using my free mobile mortgage calculator app. If you want to download the app so that you can run specific scenarios tailored to your life, then you can download it here:

Get my mortgage calculator app

Okay, let’s start with the example!

Your Current Situation: Before Refinancing

Let’s imagine this is your current situation. 

The following table shows your current mortgage is at a rate of 2.5% with a 25 year amortization and it shows all your other outstanding debts. Your monthly total debt payment is $2794.47.

Refinancing Scenario A

Now let’s see what happens if you refinance your mortgage at a rate of 1.9% with a 25 year amortization and use the new mortgage to pay off all your debts.

Your monthly debt obligation has been reduced by $950.85/month to $1843.61!

Does that benefit you? Would your life be better with an extra $950 every month?

Refinancing Scenario B

Let’s go one step further and see what happens if you refinance your mortgage at a rate of 1.9% but with a 30 year amortization.

In this case, your monthly debt obligation has been reduced by almost $1200 to $1604.41!

Does that benefit you? Would your life be better with an extra $1200 every month?

If your answer to that is yes, then it seems the answer to the question “Should I refinance my mortgage?” would be clear.

Or maybe it would be clearer if you ask this question, “Why wouldn’t I do it? Why wouldn’t I take the extra $950 or $1200 per month?”

Should you Refinance your Mortgage?

Ultimately, you can only answer the question “Does refinancing my mortgage benefit me?” after some analysis as it depends on the numbers such as your total debts, the new mortgage rate you could get, etc.

At the very least, it’s worth running the numbers to see if there is indeed a benefit for you in your current situation. 

If you want someone to run the numbers for you, feel free to contact me. I’d be glad to do it for you.

Related Posts:

• How Much Mortgage Can I Afford?
• What are GDS and TDS? Answered with Examples

What Size Mortgage do I Qualify for?

Many people ask me, “How much mortgage can I afford?” or “What size mortgage do I qualify for?” They usually think they are the same question, however, what you can qualify for and what you can afford are actually two different things. 

I’ll treat them as the same question to start, since most people do. At the end, I’ll treat them separately so you can understand why you sometimes can’t afford as much as you qualify for.

So before I show an example mortgage calculation, we’ll discuss:

– The three things your mortgage amount depends on

Then we’ll go through:

– The three things that limit the size of your mortgage

Just Tell Me the Size of the Mortgage I can Get!

Okay, if you just want a quick estimate of how much of a mortgage you can get, use a mortgage calculator like my free mobile mortgage calculator app.

All you really need to know is the amount of mortgage payment you are willing to pay each month. Then you can change the other inputs and play around with it.

The mortgage amount it will give you is just an estimate. As you’ll see below, the real amount can depend on many things.

How Much Mortgage Can I Afford / Qualify for?

The amount of mortgage you can qualify for will depend on many things but mainly:

• Your income,
• Your credit score, and
• How much you have available for a down payment 

Mortgage Size Factor #1: How Much Income you Earn

The more you make, the bigger the mortgage you can qualify for. Pretty simple.

It can get complicated, however, because sometimes the amount of income you earn isn’t always the same as the amount you can use on your mortgage application.

Those two amounts can differ for a few reasons e.g. your income is not consistent from year to year (due to things like bonuses, tips, career changes, etc.), you have rental income, you have foreign income, you’re on sabbatical, etc.

For example, I had a client whose spouse made $80k in the most recent year and $20k the previous year. That variance is too high for lenders. In that situation, lenders won’t accept any income from the spouse at all.

Mortgage Size Factor #2: Your Credit Score

Your credit score will affect the mortgage rate you can get. If you have good credit, you can get a lower rate which will lower your monthly payments, keeping those payments within your affordability range.

Mortgage Size Factor #3: How Much You Have Available for a Down Payment

The bigger your down payment, the bigger the home you can purchase.

If you have $25k available for a down payment, the biggest home you can theoretically get is a $500k home (assuming you could qualify for and afford a $475k mortgage, which we’ll address in our example).

If you double that down payment to $50k, you can get a $750k home.

If you have $75k available, you can get a $1M home.

What Limits the Size of the Mortgage I can Get?

Now that we know what your mortgage amount depends on, let’s discuss the limiting criteria for your mortgage amount. 

There are three things that limit the size of your mortgage:

• The minimum down payment required,
• Your GDS/TDS ratios, and
• Your budget 

Mortgage Limit Factor #1: The Minimum Down Payment Required

Depending on your situation you may be allowed to put as little as 5% down on a home purchase, however, you may be required to put up to 20% down.

For example, as we saw above, if you are not required to put a minimum of 20% down and you have $75k available for a down payment, you could theoretically purchase a $1M home. 

However, if your situation requires that you do put a minimum of 20% down, then for that same $75k down payment, you could only get a $375k home. 

Mortgage Limit Factor #2: Your Debt to Service Ratios: GDS and TDS

GDS and TDS are measures of how much debt you have compared to how much income you earn. They are calculated by adding all your debts and dividing that by your total gross income.

Generally, your GDS cannot exceed 39% and your TDS cannot exceed 44%.

Read my previous article for more details on GDS and TDS and to see examples of how to calculate them.

Mortgage Limit Factor #3: Your Budget

Everyone has a limit as to how much they can afford for a monthly mortgage payment. 

You may qualify for a mortgage that requires a monthly payment that is more than you are comfortable with, even if you satisfy the first two criteria. 

After all, all of your money can’t just go toward the mortgage. After paying taxes, you still need money for things like car and life insurance, clothes, groceries, kids’ education savings, retirement savings, vacation savings, hobbies, having pizza on a Friday, etc. 

Okay, let’s look at an example and put all of this together!

How to Determine Your Mortgage Amount: the Scenario

Let’s consider the following scenario.

Lender rate: 2.50%

Qualifying rate: 5.25%

Amortization period: 25 years

Total gross income of all applicants: $100k/year

Down payment amount: $100k

Total debts (credit cards, car loans, etc.): $400/month

Property taxes: $250/month

Heating costs: $125/month

No condo fees

Budget for mortgage payments: $2000/month

How to Determine Your Mortgage Amount: the Analysis

As we’ve already seen, if you have to put 20% down, the biggest home you can buy with a $100k down payment is a $500k home. But if you are allowed to put less than 20% down… you can get a bigger mortgage! Let’s see how much bigger.

Note that since you are putting less than 20% down, you will have to pay mortgage insurance which will be added on top of the mortgage.

You can use my calculator to calculate GDS/TDS or work it out based on my previous article. Either way, you will see that, using the qualifying rate of 5.25% and including mortgage insurance, you reach your GDS and TDS limits at a purchase price of $566k. 

At $566k, your GDS will be 38.95% and your TDS will be 43.75%. Once you subtract the down payment from the $566k purchase price and add mortgage insurance, you’re left with a mortgage of $479k. That is the maximum amount you qualify for since you’re not restricted by a 20% down payment.

The last thing we have to check is to see if you can afford this mortgage.

In this case, your actual mortgage payments are based on the lender rate of 2.50%. Your monthly mortgage payments (which include mortgage insurance) would then be around $2150/month.

Since your budget for the monthly mortgage payments is $2000/month, the $2150/month mortgage payment is outside your budget. You cannot afford a $566k home even though you are qualified to buy one.

A $2000/month mortgage payment equates to a home purchase price of $535k. At that purchase price, all three criteria are satisfied i.e. your minimum down payment, your GDS/TDS ratios, and your budget.

How much mortgage can I afford? Final Answer

So, in this example, the answer to the question, “How much mortgage can I afford?” is: $447k.

That mortgage amount is equal to the purchase price of $535k minus the $100k down payment plus mortgage insurance.

Want to know how much mortgage you can afford? Give me a call and I’ll be happy to run the numbers for you.

Related Posts:

• Should I Refinance my Mortgage?
• What are GDS and TDS? Answered with Examples
• What is the Minimum Down Payment Required for a Mortgage?

What are GDS and TDS? Why are They Important?

GDS and TDS are debt to income ratios. They are ratios that measure how much debt you have relative to how much income you earn. They are important because they can limit the size of the mortgage that you can qualify for.

GDS stands for Gross Debt Service. If you are applying for a mortgage, it is calculated by adding up the mortgage payment, property taxes, heating costs, and half of the condo fees (if applicable) and dividing it by your total income.

In general, your GDS cannot exceed 39%.

TDS stands for Total Debt Service. Calculating TDS is the same as calculating GDS except that, in addition to mortgage payments, taxes, heat, and half of the condo fees, it also includes all your other debt payments like car loans, credit cards, lines of credit, etc.

So TDS is calculated by adding the mortgage payment, property taxes, heating costs, half of the condo fees, credit card debts, and loan debts and dividing that amount by your total income.

In general, your TDS cannot exceed 44%.

The Government of Canada Mortgage Stress Test

Before we perform some sample calculations, it’s important to clarify what mortgage payment is used in these calculations.

For the purposes of calculating GDS and TDS, you don’t simply use the mortgage payment that you would pay based on the rate that you would get with a lender.

The mortgage payment must be calculated at either the rate of 5.25% or the rate you can get plus 2%, whichever is higher. This is called the “stress test” and the government introduced it to address the issues that arose during the financial crisis of 2008.

The crisis occurred partly because interest rates increased and home owners were no longer able to make the mortgage payments which also increased.

So the stress test ensures that your GDS will remain below 39% and your TDS will remain below 44% even if interest rates were to eventually go up by at least 2%.

GDS and TDS Calculators

Note that all of the below calculations were performed using my free handy dandy mobile mortgage calculator app.

Aside from calculating things like mortgage payments, the app can also calculate GDS and TDS ratios for any situation. If you’re interested in downloading the app so you can run the calculations for your own personal scenario, click here:

Get my Free Mortgage Calculator App!

Now let’s go through some examples to make everything clear!

Example Scenario for GDS and TDS Calculations

Let’s say you want to apply for a $400 000 mortgage at a rate of 3% and an amortization period of 25 years.

Your actual monthly mortgage payment would be $1893. But that’s at a rate of 3%.

According to the government stress test, you have to calculate the mortgage payment by using the qualifying interest rate of either 5.25% or 5% (which is 3% + 2%), whichever is higher. In this case, the rate of 5.25% is higher.

So the qualifying mortgage payment for a $400 000 mortgage at 5.25% and an amortization period of 25 years is $2384/month. This is the mortgage payment amount that we will use in the GDS and TDS calculations below.

Let’s also estimate the following:

Property taxes: $250/month

Heating costs: $100/month

Condo fees: $200/month

Car loan: $400/month

Credit card payments: $150/month

Total gross income of all applicants: $7500/month ($90 000/year)

Now for the GDS calculation!

Example 1: GDS Calculation

GDS = (mortgage payment + property taxes + heating costs + 50% of condo fees) / (total gross income)

GDS = ($2384 + $250 + $100 + 50% of $200) / ($7500)

GDS = 37.78%

So your GDS is under the 39% limit. So far so good!

Example 2: TDS Calculation

TDS = (mortgage payment + property taxes + heating costs + 50% of condo fees + car loan + credit card payments) / (total gross income)

TDS = ($2384 + $250 + $100 + 50% of $200 + $400 + $150) / ($7500)

TDS = 45.12%

So your TDS is over the 44% limit.

Since you have to pass both the GDS and TDS requirements, you would not qualify for the $400 000 mortgage as it is.

Is all Lost? Can a Mortgage Agent Help you Qualify?

But not all is lost! In this case, there are things that your mortgage agent can advise you to do so that you do qualify.

For example, they can advise you to pay off part or all of your credit card if you can.

If you can’t pay off your credit card, your mortgage agent can find you a mortgage with an amortization period of 30 years.

Both of those things would get your TDS under the 44% limit. And then you would qualify for the mortgage!

Clarification on GDS and TDS Limits

Note that I say that “in general” your GDS has to be under 39% and your TDS has to be 44% to qualify for a mortgage.

Those limits are primarily for the big banks. Mortgage agents have access to big banks but also to lenders that will allow higher GDS and TDS ratios. After all, access to various lenders is one of the benefits of using a mortgage agent!

The calculations get a bit more complicated when you factor in self employed income, rental income, foreign income, or when you don’t know what is considered a debt, but those are the basics of GDS and TDS calculations.

If you have any questions about how to calculate GDS and TDS ratios for your own personal scenario, contact me and I’ll gladly help you out!

Related posts:

• How Much Mortgage can I Afford?