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The Full Mortgage Amount: Should You Spend It All?

Buying a house in Canada can be hectic, as it entails properly handling your finances to make your home purchase easier. Aside from that, it would help if you determined how much mortgage you need to secure. After all, homes are on the market for different prices.

This is where mortgage pre-approval comes into the picture. Before buying a new home for you and your family, you must understand how mortgage pre-approval works and how it can help you with your mortgage loan.

What is Mortgage Pre-Approval?

Like most homebuyers, you’ll need a mortgage to finance your purchase. Before you can get a mortgage, you’ll need pre-approval. A mortgage pre-approval is a note that explains how much you can borrow for a home purchase. This is based on your income, credit score, and down payment size.

Getting a pre-approval letter means the lender will evaluate your financial situation and determine an amount you can afford to borrow. But what if the lender approves a higher mortgage amount than what you need? Should you spend it all? The answer is no. 

The mortgage amount you get is not a “use it or lose it” deal. If you only borrow the amount you need, you’ll have a lower monthly mortgage payment. That’s because your loan will be for a smaller amount, and you’ll have a shorter loan term. 

In addition, you’ll have less debt and interest to pay over the life of your loan. That means you’ll have more equity in your home, and you’ll be paying it back over a shorter period. This can be good if you ever need to sell or refinance.

How Does the Lender Determine the Mortgage Amount?

When you go to a bank or lender for mortgage pre-approval, you’ll instantly receive a quote for the maximum amount you can borrow. They often use mortgage ratios to identify what you can afford based on your:

  • Gross Debt Service Ratio: Your mortgage expenses should include your monthly fees, including the GDS ratio items. You can also add debt payments, such as credit cards, lines of credit, car payments, and alimony/child support.
  • Total Debt Service Ratio: The gross annual income required to qualify for the mortgage loan is called the TDS. This is the percentage of your yearly gross income that can pay your mortgage and all other debts.

How Much You Can Afford to Buy Your New Home

Although it’s tempting to use the full mortgage amount you’re approved for, you still have to consider various factors before deciding. These can include your current expenses, how much of a down payment you can afford to make, and whether you need to get a mortgage insurance policy.

It would help if you studied whether you want a conventional mortgage from a private lender or a government-backed mortgage. Conventional mortgages are available from private lenders, while government-backed mortgages are from government agencies like the Canada Mortgage and Housing Corporation (CMHC).

Once you’ve considered all these factors, you can start shopping around for a mortgage and compare interest rates and terms from different lenders. You can also work with a mortgage agent to help you find the best mortgage for your situation.

Final Thoughts

It is important to consider whether or not you should spend the full mortgage amount when taking out a loan. There are pros and cons to doing so, and it ultimately comes down to your financial situation. Spending the full amount may be a good option if you can pay off the loan immediately. However, if you are tight on cash flow or have little extra money, it may be better only to borrow what you need. 

Ottawa Mortgage Services is a mortgage agent that can help you with your mortgage loan pre-approval in Ottawa. Get in touch with us today for a free consultation!

Contact Ottawa Mortgage Services to learn more

funding@ottawamortgageservices.ca

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