What Is The Mortgage Sliding Scale?
And How Will It Affect Your Mortgage Approval?
Considering Ottawa’s recent housing prices, it is likely that you will need a higher sum of money, therefore a larger mortgage too. It is also very likely you will come across the term “sliding scale” which might sound terrifying, especially if you’re a first home-buyer. Keep on reading this article to find all the information you need when it comes to mortgages and sliding scales.
What Is The Mortgage Sliding Scale?
In simple terms, a mortgage sliding scale is a form of risk mitigation a lender takes when the mortgage wanted is above $1,000,000. The higher the mortgage, the bigger the risk is for the lender, so they will use a sliding scale to calculate the minimum down payment they will need.
Usually, 20% of your potential new home’s price is enough for a down payment. If the price of the house you are looking to buy exceeds the $1 million mark, there is a chance you will most likely be affected with a mortgage sliding scale and have to pay more than 20% for a down payment.
The reason is that they are created so that as the property’s price increases, the larger the down payment is. For example, your 20% down payment can be accepted, but only for the first million. For the amount above it, the lender can ask for an additional percentage for a down payment.
Why Is It Used?
As we mentioned, it is mostly related to the bank’s risk. If the housing market were to correct, the value of the home could descend more if the purchase price was higher in the beginning. This way, the scale reduces the lender’s risk.
For example, if a market correction happens, the more expensive property has more room for the price to fall. This is happening because mortgage loan insurance isn’t available if the purchase price of the home is $1 million or more. So, lenders apply sliding scales to mitigate against the potential for increased loss.
Factors That Can Trigger The Use Of A Sliding Scale
The biggest factors that can trigger the use of a sliding scale are the property’s price and its location. Not everyone can afford or wants to buy an expensive home. That also plays a role in the mortgage sliding scale – because if needed, the property will be harder to sell, simply because of good old-fashioned supply and demand law – if no one wants to buy it, you won’t sell it.
Also, it is a well-known fact that certain cities or neighbourhoods are more expensive than others.
High Purchase Price
As discussed above, a higher purchase price means a higher down payment, especially when the sliding scale is in the game as well. In some cases, you may come across a lender that won’t have strict rules or conditions, but with some of the more conservative lenders, it might happen that you will need to give 50% of the amount above $1 million as an extra down payment.
That’s why it’s important to have an experienced mortgage broker by your side who can help you overcome any possible issues in this area.
The Location of the Property
Some neighbourhoods are more expensive than others, and by more expensive we are strictly talking about the price of homes.
Usually, the closer to the city’s core, the more expensive a home is. But sometimes, certain lodges outside of the city, close to nature can be more expensive.
That of course depends on the city and the property type, the year it was built in and other variable factors.
How Does It Affect Mortgage Approval
As we mentioned, a bank might approve 80% for the first $1 million of the purchase and 50% for the remaining sum. But that is not an absolute truth – sliding scales vary among the lenders and the percentages don’t have to be the same in each bank.
However, if you are thinking of applying for a larger mortgage, take into account that you might wait longer for approval. Also, with a large mortgage, come more rigorous penalties for breaking the contract.
Tips to Consider When Seeking a Large Mortgage
Of course, the first thing to think about is being sure you can afford it. Get your finances in order, pay off your existing debts and improve your credit score as much as possible. Save up for a larger down payment and try to find a lower mortgage rate. Other than that, consider taking these tips into account:
Review the Terms Carefully
Pay attention to the fine print. Read your contract carefully and be sure to understand everything written on it.
Ask questions, hypothetical situations and solutions, and address the terms and conditions that come with your mortgage, especially the prepayment penalties.
Be aware that the penalties charged by lenders are affected by the mortgage size.
Larger mortgages are usually escalated to the higher-ups, so it might take longer for you to get the approval and maybe see the house you wanted get sold. That’s why it’s better to come prepared and get pre-approved when applying for any mortgage, especially a larger one.
Work With a Mortgage Broker to Get the Best Rate
You will pay a lot of money to get the house you want, so why not work extra hard to make sure you have the best possible rate? Ask for quotes from different lenders, do your research and try negotiating. Your mortgage broker can help you with this and make sure you get the best treatment and the best conditions. We can help with that.
Buying a home is a big deal and you need to make sure you’re taking the best possible steps for a better future. A mortgage sliding scale might sound frightening but by doing proper research and having a good partner by your side, it might go smoothly. However, don’t underestimate it. Give us a call and let us get you your dream home.