When looking for a home, probably the first thing you will do is establish a price range. After all, what’s the point of looking at houses that cost $400,000 if you can only afford to pay half that? Setting a price range is easier said than done, however, and a number of factors come into play. The two main things to consider are how much of a down payment you can afford to make, and how much of a mortgage you can afford to carry.
A mortgage covers the difference between the purchase price and your down payment. The larger the down payment, the less you have to borrow, the smaller your monthly mortgage payment, and the lower your cost of interest over the term of the mortgage. If you can afford to put down 20 per cent of the purchase price, the Canada Mortgage and Housing Corporation (CMHC) will not require you to take out mortgage insurance against your mortgage, further reducing the cost of your home over time.
You should also have a cash reserve for unexpected expenses and post-purchase expenses such as land transfer tax, legal fees, mortgage arrangements, moving expenses, new furnishings and appliances.
The other cost to consider is the amount you can afford to pay monthly towards your mortgage. Financial institutions do this by calculating your debt-service ratio. To calculate your debt-service ratio, list all your loans (car, personal loans, monthly credit card balances). The sum of these loan payments and your mortgage payment (including principal, interest and taxes) should not exceed approximately 40 per cent of your gross income. The mortgage payment and taxes should not exceed approximately 30 per cent of your gross income.
The size of the mortgage you can arrange, based on payments you can afford, depends on interest rates. The lower the rates, the larger the possible mortgage and the more affordable housing becomes. Also consider how open the mortgage is – can you choose a variable rate and then lock it in when rates begin to rise? Would prepayment be allowed? Is the mortgage portable should you need to move before the term is up?
The usual source of mortgage funds is a lending institution such as a bank or trust company – and it is the particular policy of the lending institution that determines the maximum loan allowed. But there are other sources of funding, too. A real estate professional can help you navigate the field and choose the best lender at the best rate and terms.
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