How Much Can You Afford?
That is a very important question for anyone looking to buy a home and one that should best be answered before you even begin looking for a house.
To answer this question, you should closely examine your finances including income, expenses, investments, savings, loans and debts. Looking at your financial situation will help you figure out what you can afford in monthly mortgage payments and how much you can put towards saving for your down payment. A Coldwell Banker realtor can help you in assessing your individual financial situation.
The Monthly Mortgage Payment
Ideally, the monthly mortgage payment should be determined after you consider all of your monthly income and expenses.
However, you can also get an idea of what you can spend each month by using a simple and often used calculation called the Gross Debt Service Ratio (GDS). Basically, most lenders recommend that you spend no more than 32% of your gross (before tax) monthly income on housing costs (which includes monthly mortgage principal and interest, taxes, and heating).
For example, if your gross monthly income is $4,000, then you shouldn’t pay more than $1,280 ($4,000 X 32%) in monthly housing expenses (which includes mortgage, property taxes and heating costs). To calculate the maximum mortgage payment you can afford each month you will need to subtract the monthly property taxes and the heating costs from $1,280. So if your estimated property taxes and heating costs (monthly) are $280 then your mortgage payment would be $1,000. To determine what house value you could afford with this monthly mortgage payment, please use this mortgage calculator. Please click here to determine different payment options on a mortgage calculator.
Please note that your realtor will have access to property tax and heating costs information to help you calculate the payment for a specific home.
The Down Payment
You will also need to determine how much money you can put forward toward the price of a home. A down payment generally ranges from 5% to 25% of the purchase price.
If you make a down payment of 25%, then you can get what is called a conventional mortgage. For this type of mortgage, you will not have to obtain insurance or pay additional premiums.
If you apply less than 25%, then you can get what is called a high ratio mortgage. This type of loan must be insured against default by the federal government through the Canada Mortgage and Housing Corporation (CMHC) or an approved private insurer. For this type of mortgage you would pay a one-time insurance premium to the insurer (ranging from .5% to 3.75% depending on the size of the loan and value of the home; additional charges may also apply. Your realtor can provide you with the estimated costs.). The premium is usually added to the principal amount of the mortgage. With mortgage loan insurance, if you default on your mortgage, the lender would be paid back by the insurer.
To determine how much you can afford for a down payment, you should review your assets and liabilities to calculate your cash remaining that can be applied to the mortgage. Your down payment cannot be borrowed but you may be able to use your RRSPs – ask your realtor for more information.
Getting your down payment together will mean a lot of saving, planning and budgeting, but it will be worth it. The more you put down, the more you will save in the long run by paying less interest.