Are you planning to buy your dream home but not sure if you have the means? How much mortgage you can afford requires several considerations to answer. Nevertheless, those considerations inform the lenders’ response to “how much mortgage can I afford?”.
Factors like household income, debts, the available amount for a down payment, stress test, credit rating, etc., are considered. For a home buyer, having a certain level of understanding of your home payment and affordability is important. You may have a relatively stable income and savings, but the impact of impromptu spending is worth noting.
A good rule of thumb is to have enough cash reserve to cater to the payment and other needs. The idea is to ensure you can afford the payment even in the face of unexpected events.
If you’re a Canadian looking to purchase a house, the odds are you’ve asked yourself, ‘how much mortgage can I afford?’. Similar questions often asked are ‘how much mortgage can I afford Ontario?’ and ‘how much mortgage can I afford Canada?’.
Well, let’s dive in deeper to find out the factors affecting how much mortgage you can afford.
Mortgage affordability has been a hot topic in Ontario, British Columbia, and other parts of Canada.
The real estate market is booming and hence, skyrocketed in recent years. Although prices have been slightly better recently, Canadians still face property affordability challenges.
Lenders do not randomly provide answers to ‘how much mortgage can I afford?’, ‘how much mortgage can I afford Ontario?’, and ‘how much mortgage can I afford Canada?’. They ask questions, require preapproval documents, and apply some estimation mechanics as follows:
Ideally, your annual payment for shelter shouldn’t be more than 32% of your annual gross income. Note that shelter cost includes what caters to your principal amount, interest, property taxes, and condo fees of 50%, if applicable.
The percentage of your gross annual gross income that caters to your shelter, debts, and all other household expenses should not exceed 40.
The federal government designed the mortgage stress test to ascertain borrowers’ affordability if rates increase. Hence, it is a test that loan seekers are subjected to before answering the question, ‘How much mortgage can I afford?’.
Lenders do not consider these factors before giving you a house loan, but you should. They help decide how much mortgage you can afford to avoid being burdened instead of blessed.
Let’s start with the more straightforward method to answer how much mortgage you can afford.
Your “gross” income before taxes: make a two years estimate of your total income as a guide. This estimate includes income from all sources, like salary, commissions, bonuses, and all other generated income, before deducting tax.
Your “net” income: also, make a two years estimate of your remainder from your income after tax.
Estimate the expenses you are likely to incur over the next five years. Of course, one cannot live without necessities and some creature comfort, so ensure to set fair amount to cater for them. Some of these expenses include internet, domestic obligations, transportation, and others applicable to you.
Additionally, prioritize saving at least 10% of your income because emergencies do not make a pre-arrival announcement. Cash reserve is not a luxury but a necessity, especially if you embark on a loan journey.
How much mortgage can I afford in Ontario? How much mortgage can I afford in British Columbia? Those are just a few of the questions many Canadians ask when planning to seek a home loan. One way to determine answers is by using an affordability calculator.
Many lenders, especially those with an online presence, offer these calculators. They are designed to assist you in estimating how much mortgage you can afford based on the data you inputted. The mortgage affordability calculator is useful for calculating payment rates, interest, and other data.
Learn how to use a mortgage affordability calculator with these simple steps:
The steps may vary from one calculator to another, but you would need to input certain information into the calculator. Once you press the calculate button, you will receive a loan amount you can afford based on your input.
If you’re still asking how much mortgage I can afford, there’s a simple answer – calculate it yourself. Calculating your TDS and GDS to determine how much loan you can afford is something you can do by yourself. The formulas aren’t rocket science but can be a bit taxing. Let’s go:
(Mortgage payments + property taxes + heating costs + 50 per cent of condo fees)
÷ annual income = GDS ratio (this should be less than 39%)
(Housing expenses (use GDS numbers) + credit card interest + car payments + loan expenses)
÷ annual income
= TDS ratio (this should be less than 44%)
A purchase price of up to $500,000 will require a 5% minimum for a downpayment. It is 10% if the cost is between $500,000 and $1 million. However, for a purchase price over $1 million, 20% is the required down payment.
Mortgage insurance is needed for a downpayment of less than 20% of the purchase cost. Consider it as an added premium placed on your mortgage. However, it is only available for properties with a minimum price of $1,000,000.
Debt-to-Income (DTI) Ratio is an important metric that lenders employ to calculate how much mortgage you can afford. It is a comparison ratio of your total monthly debts against your monthly gross income.
Your qualification ratio depends on your credit rating, but housing expenses shouldn’t exceed 28% of your monthly income overall.
With taxes and insurance, let’s assume your monthly payment is $1,260. With a gross monthly income of $4,500, your DTI is 28%. (1260 / 4500 = 0.28)
To determine your housing budget, in this case, simply multiply your income by 0.28. With this simple illustration, you’d be allowed a mortgage of $1,260 to achieve a 28% DTI. (4500 X 0.28 = 1,260).
The federal government introduced a rule that governs Canadians’ qualification for mortgages from federal banks in 2018. Some are confused about the new rule: all Canadian home buyers should pass a mortgage stress test. We’ll break it down.
The stress test is designed to help decide if a conventional mortgage applicant can afford it if the rate goes up. The test is necessary considering the fluctuation of the economy and the likelihood of fluctuation in interest rates too.
The mortgage stress test does not aim to frustrate your effort toward purchasing your dream home. However, the stress test results decide if you qualify for the loan and answer the question, ‘how much mortgage can I afford?’. This test applies to all homebuyers, even those making a down payment of 20%.
You’ve probably noticed that calculating ’how much mortgage can I afford?’ includes an estimate of the rate you’ll be charged.
Four major factors form the base on which lenders will adjudge how much mortgage you can afford:
Lenders will immediately swing into negotiating your mortgage loan and interest rate if they find you worthy of the loan. Nonetheless, your credit rating is a metric that plays a significant role in deciding your mortgage rate. Additionally, a lower interest rate means lower monthly payments.
The simple answer is yes, it can. However, the loan you choose affects the answers to ‘how much mortgage can I afford?’. That is because mortgage loans vary, and so do their terms and conditions.
Aside from the previously discussed factors, other factors that shape the answer to ‘how much mortgage can I afford?’ are:
Closing costs usually demand 2% to 5% of the home cost. This cost can affect how much mortgage you can afford based on how you make the payment.
The best way to learn about property tax rates in a given location is to explore the website of the county assessor and local real estate listings. Property tax rates vary from 0.30% to 2.13% of the assessed value of a house across the country.
Homeowners’ insurance costs more in places where homeowners file more claims. These tend to be placed with more crime or storms.
Expect to pay mortgage insurance if you make a downpayment of less than 20%. A higher down payment and credit rating attract lower insurance rates and shorter payment terms.
You may be obliged to get flood insurance if your house is located in a high-risk flood zone.
Realtor.com opined that $200 to $300 monthly is the typical HOA fee. However, these fees depend on the number of community amenities, upkeep, and services.
Home maintenance requires money, depending on the size and existence of the house. More budget is needed to maintain large and old homes. If it is a shared building, the cost for most maintenance is shouldered by the homeowners association. You’d need to budget for home maintenance if you purchase a home.
Mortgages are an essential part of the homeownership process for Canadians who cannot afford outright payment for a property. Luckily, there are different types of mortgage loans. Nonetheless, in the quest for one, ‘how much mortgage can I afford?’ is often asked.
Different factors determine the answer to that question, which this article has extensively covered. However, borrowers should exercise caution to avoid being in debt decades longer than they have to be.
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There is no fixed response to how much mortgage you can afford. That is because factors like the down payment, mortgage stress test, income, credit profile, debt record, and more are considered. However, it is worth noting that you qualify for a mortgage today doesn’t mean you can afford it with future considerations.
A simple answer to this question is to get pre-approved for a mortgage. Then, lenders and brokers will quickly review your details to determine how much mortgage you can afford in Canada. They will also consider factors like a mortgage stress test.
Many factors are considered to pull an answer to this. One easy way is to use a mortgage affordability calculation. For safe play, it is recommended to go below the price you are told you can afford.
The rule of thumb is that a monthly housing cost of less than 32% of your gross income is affordable. Nonetheless, a combination of other factors like closing costs, down payment, cash reserve, and future expenses have a role to play.
While more factors than just your salary are put into consideration before deciding your loanable amount, here is a basic breakdown for a salary of $70,000: Now, let’s assume you can afford a down payment of $30,000 and a rate of 4%. In that case, you may be able to afford a mortgage between $268,000 and $346,000. With a $70,000 salary, you can afford a monthly payment range of $1,500 - $2,000.
Going by the 28% rule explained in this article, with an annual earning of $30,000, you could afford a $700 monthly payment. Ideally, your home budget should not exceed three times your annual earnings. In simpler words, for a $30,000 earner, your budget for a home purchase should be equal to or less than $90,000.
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