Just because the numbers say you can, doesn’t mean you can afford it!
With interest rates continuing to hold steady at record lows in Canada, many prospective buyers remain confident in purchasing homes and condos. Today’s guest blogger, mortgage broker Marci Deane, provides some insight into determing the mortgage you can best afford.
While most of us have a basic knowledge of our monthly expenditures, others need to explore their finances to find out. To come to terms with your maximum mortgage payment, you need your monthly gross income and your monthly debt payments. Calculate 33% and 44% of your monthly gross income.
Your monthly mortgage payment, plus mortgage insurance, property tax and strata fees (if applicable) must be less than the 32%. Now, take those monthly payments and add all other monthly debt (payments to loans, credit cards, leases, etc.). This amount must be less than the 44%.
Going to the max:
In the current environment of low interest rates, you want to be cautious about going to your maximum mortgage amount because an increase in rates could be devastating.
For example, a couple with a combined income of $135,000 might qualify for a $750,000 mortgage at 2.99%. Their payments would be approximately $3,200 a month. If rates increase to 5%, that monthly payment increases to $4,075 – $6,900 more each year. The amount they would qualify for at that higher rate would reduce substantially to $585,000.
There are times when you fall in love with a house. If it sits at your maximum it means you can afford it, right? Yes, on paper, you can afford your maximum, but only in rare circumstances would I suggest it.
So, if love isn’t a good enough reason to go to your maximum, what is?
An almost certain increase in income and a significant down payment (35% or more).
Having a job where your salary is almost guaranteed to increase makes going to your maximum easier. As is, when the maximum is calculated on one income but a second income will be introduced (ie – a spouse returning to work after mat leave), or the possibility for income from a rental suite.
These things don’t make the deal work, they simply ensure an increased income to make going to the maximum safer.
Getting a higher priced property is easier with two incomes, a larger down payment, familiarity with making mortgage payments, an expectation of future funds to apply to the mortgage (bonuses, inheritance), a more secure job, or the intention to stay in the house longer.
Lean towards a cheaper option when a rate increase would make your budget impossible, the budget required would be difficult to stick to, economic or income expectations are uncertain or you are planning on adding to your family.
Yes, getting a more expensive house is tempting and there are times when it will work and be worth it. Take stock of your personal finances to ensure it’s the right decision and won’t lead to a painful outcome.
All rights reserved. Disclaimer: This article is designed to provide information for personal use only. Please consult your professional mortgage broker for further professional advice. Habitat Insurance Agencies Ltd is not responsible for any legal disputes of this matter.