How much can you afford ?

It’s simple to get carried away with all of the different mortgage options that are available. Establishing a debt-to-income ratio and utilizing online mortgage calculators can help you on your way, as well as meeting with a mortgage broker. These options will assist you so that you don’t end up with a mortgage that you can’t afford.
 
Debt-to-income ratio
 
When meeting with a lender, they will use a debt-to-income ratio in order to establish how much you can afford in mortgage payments. A debt-to-income ratio is the percentage of your income that goes towards paying debts. This is divided into two categories.
 
The first is a Gross Debt Service (GDS) ratio, which divides your housing expenses by your income. Housing expenses include mortgage payments, heating costs, property taxes, and half of your condo fees (if applicable).
 
For example, using a mortgage of $1200 per month, you add that to your property tax, heating costs, and half of your condo fees (if applicable), and divide by your gross monthly income. This will give you your GDS.
 
The second category is a Total Debt Service (TDS) ratio. This divides your housing expenses plus recurring debt by your income. Recurring debt can be classified as credit card payments, car payments, and other loans.
 
In order to determine your TDS, you add the example monthly mortgage payment of $1200 plus your property tax, heating costs, half of your condo fees (if applicable) and your recurring debt, and finally divide that amount by your gross monthly income.
 
The only difference between the two is that a TDS also includes recurring debt. From a borrower’s perspective, the TDS is more important since it will demonstrate whether you can afford the monthly payment with all of your debt. But from a lender’s perspective both of these categories are equally important when being qualified for a mortgage.
 
When qualifying for a mortgage, the lender generally looks at a debt-to-income ratio of 32/40. The first percentage is your GDS, and the second is your TDS. As long as your GDS and TDS figure are below 32 per cent and 40 per cent, you should be able to make your payments.
 
Lately lenders have come up with new guidelines and products and they sometimes allow for a debt-to-income ratio of 35/42, says Walter Koziej, mortgage specialist at Mercury Mortgages Inc. “If the credit is very good, they will look at a TDS of 44 per cent and no GDS requirement. Some banks, though, still use the old guidelines.”
 
Are you looking to buy a home or invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate
 
For example:

GDS
Monthly mortgage payment: $1150
Property taxes: $150
Heating costs: $100
½ condo fees: 0
Total housing costs: $1400
Divided by gross monthly income of: $4500
Equals: .3111
GDS Ratio: 31.11 per cent
TDS
Monthly mortgage payment: $1150
Property taxes: $150
Heating costs: $100
½ condo fees: 0
Total housing costs: $1400
Recurring debt per month: $350
Total for TDS: $1750
Divided by gross monthly income: $4500
Equals: .3888
TDS Ratio: 38.88 per cent

 
This example would give the borrower a debt-to-income ratio of 31/39. According to most lenders, the borrower would be able to afford a monthly mortgage payment of $1150.
 
Online mortgage calculators
 
Online mortgage calculators are automated tools that help you determine the mortgage you may be qualified for, as well as the financial consequences of mortgage variables including loan amount, interest rate, number of payments, and monthly payment amount. These devices also use a debt-to-income ratio of 32/40.
 
Online calculators can be found on all major banking websites. When shopping for a mortgage it is important to compare different calculators from various banking institutions in order to get the best rate.
 
“In general, online calculators are a great place to go to get a high level understanding of the mortgage amount that you may qualify for, what mortgage payments will be and how various mortgage options can benefit you,” says John M. Turner, director of new business development group, Ontario Division at Bank of Montreal.
 
Calculation depends on what you enter as your estimated gross annual income, monthly property tax, monthly heating bill, monthly loan payments (car, credit cards), and mortgage amortization period and interest rate. The final result will be the mortgage that the institution may approve you for.
 
“The online pre-approval request is based on the accuracy and completeness of the information entered by the client,” says Jacqui van der Jagt, advisor of Corporate Communications at RBC.
 
It should be stressed that the final result will vary and depends heavily on your credit rating. The amount that the calculator predicts may be more or less when you actually meet with and are qualified by a lender.
 
For example:
 
The following is based on a $140,000 gross annual income, $150 monthly property tax, $150 monthly heating bill, $500 monthly loan payment (car, credit cards), and a 25-year mortgage at a rate of 7.5 per cent.
 

Institution
CIBC
TD Canada Trust
RBC Royal Bank
Scotiabank
CMHC
Down payment
$ 30,000
$ 30,000
$ 30,000
$ 30,000
$ 30,000
VALUE OF HOME YOU CAN AFFORD
$300,000
$499,320
$480,799
$486,730
$499,291
MORTGAGE REQUIRED
$270,000
$469,320
$456,759
$456,730
$469,291
MONTHLY PAYMENTS
$1,975
$3,433
$3,433
$3,433
$3,433

 
*All figures are estimated. Final approval depends on your credit rating.
 
Your ideal mortgage
 
You’ve just been approved for a $400,000 mortgage. Congratulations! But before you sign those papers, stop and ask yourself whether or not you really need the entire amount. Just because you qualify for a large mortgage doesn’t mean you should use it all. The larger the mortgage, the higher the monthly payment, and if you can’t afford those payments you could end up in arrears and even foreclosure.
 
This is where a debt-to-income ratio of 32/40 comes in handy. Once you have calculated your ratio, either by hand or using an online calculator, you will be able to better judge how much you can afford in monthly payments.
 
Another thing to keep in mind is the additional costs when buying a home. The largest of these will probably be the down payment. Although down payment requirements have reduced in recent years, with many lenders offering no down payment options, the majority of Canadians tend to use a higher down payment typically between 5 per cent and 20 per cent to help reduce their monthly mortgage costs, says Jagt.
 
To help you bank that 5 to 20 per cent down payment, financial experts suggest investing in several savings funds. Examples of some of these investment vehicles could come in the form of RRSPs, GICs or mutual funds.
 
Other initial costs of home buying may include a deposit, a home inspection, lawyer or notary fees, land transfer taxes, moving expenses, and fees for cable, telephone and Internet hookup.
 
“Ongoing costs include mortgage loan insurance (if applicable), property insurance, monthly condo fees, heating, electricity, water and taxes,” says Jagt.
 
When finalizing your mortgage, the various options available may affect your monthly mortgage payment, though not drastically.
 
“The interest rate and amortization are the biggest options that a customer can customize at the outset that can make a big difference in payments,” says Turner. “Generally speaking, interest rates for open mortgages are higher than closed mortgages and variable interest rates are lower than fixed rates.”
 
Turner suggests sitting down with a mortgage specialist and based on your particular situation, the two of you can build a mortgage and a plan that meets your needs.
 
Required documentation
 
When meeting with a lender, remember to bring the following documentation in order to finalize the mortgage approval process:

  • A copy of your pre-arranged mortgage certificate
  • Evidence of down payment and financial information (including income if not already approved)
  • Accepted offer and MLS listing if available
  • Site floor plans and specifications if the house is a new construction
  • Name and address of the customer’s lawyer of choice

 
Understanding property tax
 
Property tax can be defined as a levy that an owner of real estate pays on their property. The taxation authority will judge the value of the property, and tax is charged in proportion to the property. Property tax is based on where you live, and is a source of revenue for Canadian municipalities.
 
Many cities provide property tax calculators online, where you can enter the current value of your property and the result will give you an idea of how much you are expected to pay annually. Usually this amount is divided into monthly payments and combined with your mortgage.
 
Are you looking to buy a home or invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate
 
Source: WhichMortgage.ca
 

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