Mortgages are a popular way for people to buy their own home and start the home ownership process. With this type of loan, a borrower can borrow money from the bank to pay for the purchase of his property. In most cases, mortgage holders will use a party or all of their net equity (the difference between the market value of your home and the current debt) as a fund paid for the loan.
It is not easy to determine the mortgage quantity you can afford on the basis of the current Canada housing prices, because interest rates vary depending on the location. In order to obtain a precise understanding of your mortgage potential, it is essential to consider the average price of Canadian houses and the interest rate that you will have to pay to reach the desired purchase price.
This article will give you a good idea of the type of mortgage that you can afford with the details of all the costs necessary to consider.
Affordability of housing in Canada
The amount of the mortgage that you can afford to varies depending on several factors, in particular the salary and your total debt burden, but it is important to note that lenders or other institutions cannot determine your maximum monthly income. In addition, what may seem an affordable amount can put you financial stress if other costs outside the house must also be taken into account.
The following steps will help you determine the amount of mortgage you can afford;
Understand the market value of your home
Before choosing your deposit amount, you must calculate the market value of your home. The market value of your home may vary depending on factors such as age and location of the property. Some areas are more attractive than others, which can also considerably affect the price of a house.
So, if you do not agree with the initial estimate by a lender of your mortgage capacity, it is important that you talk to them directly and that you explain why they may or may not be generous in their offer.
The amount by which an owner can make his deposit is governed by the following factors:
- Location of the property (certain areas are more attractive than others, which can considerably affect the price of a house)
- The age of the property (will decrease the value of your home)
- Size (large houses are more expensive to heat and maintain than the smallest)
- Condition (the value of a house will decrease if it needs repairs or reshaping)
- Occupation status (a house that is unoccupied also decreases value; because empty houses require less maintenance and can attract flights).
Debt assessment
This is a current error for many buyers of potential houses who seek to buy a house and do not clearly understand what they owe their mortgage or other loans.
The amount by which you can afford your deposit will depend on the total amount of your current debt charge. The idea behind this is that if you put less money towards your deposit, it means that you have more money left, which could be devoted to repaying your other debts.
For example, suppose you pay $ 1,500 per month on all the debts you have accumulated in the previous year (including capital and interest). In this case, it will only take 20% ($ 300) compared to what remains after having done your mortgage payments so that you can suppress $ 30,000.
Therefore, the hypothesis is that you can deposit 20% on your home and be able to reimburse all your existing debts plus the new mortgage.
Determine if the accommodation is affordable
There are many ways to calculate the mortgage quantity you can afford in Canada, but the easiest way would be to use the type of calculator available on the CMHC website, which includes several variables that would allow you to test different scenarios at the same time.
For example, you can enter your annual income, your debt burden, your type of house and the amount of the mortgage you want to pay each month and see if it comes from your budget. Alternatively, you can use the methods below to assess the affordability of your mortgage because the experts approved them.
Basic income rule
The general rule is that 4.5X Your income rule is a good starting point to determine if you can afford a house, because it puts more emphasis on real affordability than on you allocating a larger part of your salary to housing. This rule stipulates that your household income should be at least 4.5 times higher than your annual expenses and includes elements such as mortgage, taxes, real estate insurance and public services.
For example, if you earn $ 70,000 per year, you want to make sure that your total household expenses and your mortgage would be less than $ 315,000, which is equal to 4.5 times higher than your income.
What is the raw debt services ratio?
Another rule to be followed when estimating your maximum monthly income and determining the mortgage you can afford is the raw debt service ratio. This ratio indicates that your gross debt service should be less than 32% of your total gross income.
For example, if you earn $ 70,000 per year and want to buy a house for $ 250,000 in Canada, you need to make sure that your gross debt service rate is less than 32% or 32% of $ 70,000, which is equivalent to around $ 2400 per month or $ 27,600 per year.
Total debt service ratio
Several debt service ratios are used as part of the basic mortgage ratios of the mortgage mortgage and Canadian housing (CMHC) to identify borrowers who may not have sufficient financial force to buy a house or run a high risk of defect in their mortgage.
Most lenders use your total debt service ratio to determine the amount of mortgage you can afford. This is similar to your GDS ratio, except that it includes any additional debt that you might have, like:
- Car loans
- student loans
- Credit card
- Alimony and child alimony
Landers generally impose a 40% limit on your TDS ratio, because the higher this number, the more risk you can incur in the event of a financial emergency.
How does your deposit affect your affordability of the accommodation?
Your ability to deposit a house determines how affordable it should be for you. This means that if you buy a house of $ 300,000, you would have to have a reimbursement capacity of $ 2400 / month.
Some lenders will force you to pay a deposit of at least 20% of the purchase price, which is not enough to be eligible for an all -inclusive mortgage that they distribute in Canada because it is based on the value of the property. A lower deposit of less than 20% will lead to a higher monthly mortgage payment.
How the right credit affects your affordability of housing
Your history of credit management and payment of invoices on time should be a key factor when calculating the amount of money you can afford each month. If you have had a bad credit rating in the past, you may have already damaged your ability to be eligible for an all-inclusive mortgage of your lender.
On the other hand, if you have a good credit management file, this will allow you to be approved more easily for a mortgage with better terms and conditions.
Additional expenses to be taken into account for the affordability of the accommodation
Closing costs: One of the main factors you need to consider is the fence costs associated with the purchase of a house in Canada. There are additional costs that you will have to pay at the time of the fence, including recording, evaluation, title search and land transfer tax. For example, if your house purchase is $ 250,000, you can expect to pay around $ 5,000 in closing costs that can also affect your maximum monthly income.
Travel cost: The move is also a cost that you will need to take into account when determining the mortgage you can afford. This includes things such as truck rental, storage, insurance and fuel. You may want to check with friends or parents before moving to get an estimate on the amount that will cost you to move your personal effects from one place to another.
Life changes: You should also consider the possibility that life changes can occur in the future, which could affect your income and your ability to save each month for the purchase of a house. When you buy a house in five years, your current income must always support these expenses, as many people’s income change depending on promotions, increases or other job possibilities.
Savings:: You must also consider the amount you have saved for your deposit towards the purchase of a house in Canada (if applicable). This will affect the amount of mortgage you can afford, because if you have saved less than 30%, it becomes more difficult to qualify for a mortgage and obtain good interest rates on a mortgage in Canada.
Last words
Finding the right house and finding the right mortgage can sometimes be difficult, especially if you don’t know where to start. The above advice should help you determine the amount of housing costs in Canada that you can afford as well as the importance you will need.
When you plan to buy a house, it is important to take into account your life changes, your income, your debt burden and your maximum monthly expenses so that you can buy a house in your budget.
