Why your monthly payment matters more than your rate.

When it comes to buying your first home, there’s one number everyone seems obsessed with: the interest rate.  We get it, its on every bank ad, mortgage billboard, social media rate drop alert, heck even at your kid’s soccer game other parents are bragging about the great mortgage rate they got!  But here’s the truth, your rate isn’t the whole story. Not even close.

If you’re a first-time homebuyer in Ontario, there’s a far more important number to focus on and it’s the one that determines if you can afford the home you fall in love with, that is the monthly mortgage payment.  Let’s break down why that’s what truly matters, and how to make it work for your budget, not someone else’s sales pitch. 

 We have all seen the headlines,

“Rates drop 0.25%!”

“Lock in now!”

“Lowest rate in 18 months!”

Sounds exciting, right? But here’s the kicker, a lower interest rate might only save you $50-$100 a month, which is something, but Ill guarantee you spend more than that on a late-night impulse Amazon buy after a few glasses of pinot.  Meanwhile, small changes in amortization, down payment, property taxes, or even your condo fees can impact your monthly payment by hundreds.   Sometimes the rates that are dropping are not even the onese you want to get!

The focus shouldn’t be on chasing the lowest rate, it should be on building a budget you can live with (and still go on vacation occasionally).

 This is what lenders are really looking for, when you apply for a mortgage in Ontario.  Lenders aren’t just looking at your rate they are deep diving into your debt service ratios, specifically your GDS and TDS.  Bankers love their acronyms. 

GDS (Gross Debt Service Ratio) = Your housing costs (mortgage + property taxes + heat) / your income

TDS (Total Debt Service Ratio) = Your housing costs plus any other debt (car loans, credit cards, student loans) / your income

Your rate can be driven by these ratios, if you are over a certain threshold, you may be pushed to a higher interest rate lender.   Property taxes, down payment, and amortization will also drive this decision. That’s why two people with the same rate can get very different approvals.

 The sweet spot for your budget is the 32/40 rule

 Simply put, you want to have your GDS under 32% and you want to have your TDS under 40%. 

 That means if you make $6,000/month, your total housing costs should be under $1,920 (GDS) and your total debt payments under $2,400 (TDS).  Now that might be tough depending on your market area, however if you are in a modern relationship where each partner is sharing the debt load, then lets double that.   If you are making $12,000 a month as a couple or joint buyers, then you could just double the numbers above. 

That’s how you know you’re buying within your means, and not just saying yes to a house that’s “approved” but leaves you eating ramen noodles until closing.

Fixed VS Variable, the age-old question.

In 2023-2024, a lot of buyers rushed into fixed to lock things down. But now? We’re starting to see more flexibility, and variable is back on the table for some. 

Here is the COLES NOTES on the different rates, and what might be best for you.

Fixed rate equals predictability with the same payment and no surprises, this gives you what I like to call sleep insurance.   You can sleep at night and not worry about it.  Anxiety in life today is a real thing, if you are going to lay awake at night worrying about your mortgage than fixing the rate is the product for you.  

Variable rate equals flexibility plus risk as your payment can change, but so can your savings.  Do you like the casino?   The benefit is on the penalty, variable rate mortgages will typically carry the lowest penalty out there.   It could be as low as just 3 months interest.   

A great mortgage agents will not just toss you a chart and say “pick one.” We look at your income stability, your risk tolerance, and your goals. Some first-time buyers want the peace of mind of fixed. Others are okay riding the variable wave because their income is growing.  Neither choice is good, or bad, right or wrong, its custom to you and your situation. 

 A Final word on getting distracted by the shiny number.

Your interest rate does matter but it is not the MVP. Your monthly payment is what keeps you in your home, sleeping soundly, and still saying yes to dinner with friends.   Make sure you read all the fine print as with anything too good to be true, there are usually strings attached.   Other things to consider would be what is the penalty, or extra costs to break the mortgage MID term.   Guess what, you might get the dream job, and have to sell your house and move to Turks and Caico, yes, we can dream, that may trigger a huge penalty.  Breaking a mortgage unexpectedly can be one of the biggest wealth killers on the mortgage, as thousands of dollars in penalties, or legal fees can have a huge baring on the overall cost of your mortgage, which is MORE than just a low rate. 

Having an amazing rate, can be absolutely great, but that is not the #1 thing to get you to your mortgage free date.   Don’t leave the advice up to fate, get in touch with a 5 star Mission35 mortgage agent, before its too late. 

 I'm sorry I have been rhyming with my 8-year-old too much.