That
is a very important question for anyone looking to
buy a home and one that should best be answered before
you even begin looking for a house.
To answer this question, you should closely examine
your finances including income, expenses, investments,
savings, loans and debts. Looking at your financial
situation will help you figure out what you can afford
in monthly mortgage payments and how much you can
put towards saving for your down payment. A Coldwell
Banker REALTORŪ can help you in assessing your individual
financial situation.
The
Monthly Mortgage Payment
Ideally, the monthly mortgage payment
should be determined after you consider all of your
monthly income and expenses.
However, you can also get an idea of what you can
spend each month by using a simple and often used
calculation called the Gross Debt Service Ratio (GDS).
Basically, most lenders recommend that you spend no
more than 32% of your gross (before tax) monthly income
on housing costs (which includes monthly mortgage
principal and interest, taxes, and heating).
For example, if your gross monthly income is $4,000,
then you shouldnt pay more than $1,280 ($4,000
X 32%) in monthly housing expenses (which includes
mortgage, property taxes and heating costs). To calculate
the maximum mortgage payment you can afford each month
you will need to subtract the monthly property taxes
and the heating costs from $1,280. So if your estimated
property taxes and heating costs (monthly) are $280
then your mortgage payment would be $1,000. To determine
what house value you could afford with this monthly
mortgage payment, please use this mortgage calculator.
Please click here to determine different payment options
on a mortgage calculator.
Please note that your REALTORŪ will have access to
property tax and heating costs information to help
you calculate the payment for a specific home.
The
Down Payment
You will also need to determine
how much money you can put forward toward the price
of a home. A down payment generally ranges from 5%
to 25% of the purchase price.
If you make a down payment of 25%, then you can get
what is called a conventional mortgage. For this type
of mortgage, you will not have to obtain insurance
or pay additional premiums.
If you apply less than 25%, then you can get what
is called a high ratio mortgage. This type of loan
must be insured against default by the federal government
through the Canada Mortgage and Housing Corporation
(CMHC) or an approved private insurer. For this type
of mortgage you would pay a one-time insurance premium
to the insurer (ranging from .5% to 3.75% depending
on the size of the loan and value of the home; additional
charges may also apply. Your REALTORŪ can provide you
with the estimated costs.). The premium is usually
added to the principal amount of the mortgage. With
mortgage loan insurance, if you default on your mortgage,
the lender would be paid back by the insurer.
To determine how much you can afford for a down payment,
you should review your assets and liabilities to calculate
your cash remaining that can be applied to the mortgage.
Your down payment cannot be borrowed but you may be
able to use your RRSPs ask your REALTORŪ for
more information.
Getting your down payment together will mean a lot
of saving, planning and budgeting, but it will be
worth it. The more you put down, the more you will
save in the long run by paying less interest. |