How Much of a Mortgage can I Afford?
Before you begin shopping for a home, it’s important to know how much you can afford to spend on home ownership. You will want to plan ahead for the various expenses related to home ownership. In addition to purchasing the home, other significant expenses will include heating, property taxes, home maintenance and renovation as required. Two simple rules can help you figure out how much you can realistically pay for a home. You must understand these rules to understand if you will be able to get a mortgage.
Affordability Rule 1
The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating.
If you are thinking of buying a condominium or leasehold tenure
For a condominium, PITH also includes half of the monthly condominium fees.
For leasehold tenure, PITH also includes the entire annual site lease.
Lenders add up your housing costs and figure out what percentage they are of your gross monthly income. This figure is called your Gross Debt Service (GDS) ratio. To be considered for a mortgage, your GDS must be 32% or less of your gross household monthly income.
Affordability Rule 2
The second rule is that your entire monthly debt load should not be more than 40% of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.). You have calculated these on the Monthly Debt Payments form. This figure is called your Total Debt Service (TDS) ratio.
Fill in the tables below to determine your GDS and TDS ratios.
Your Maximum House Price
The maximum home price that you can realistically afford depends on a number of factors. The most important factors are your household gross monthly income, your down payment and the mortgage interest rate. For many people, the hardest part of buying a home — especially their first one — is saving the necessary down payment.
Note: For CMHC-insured mortgage loans, the maximum purchase price or as-improved property value must be below $1,000,000, when the loan-to-value ratio is greater than 80%.
Calculate Your Maximum House Price
Use the Mortgage Affordability Calculator below to figure out the maximum home price you can afford, the maximum mortgage amount you can borrow, and your monthly mortgage payments (including principal and interest).
- Interest is compounded semi-annually not in advance. The interest rate is fixed for the term of the mortgage. The interest rate is usually renegotiated at the end of the term of the mortgage.
- Minimum down payment may vary.
- These calculations are approximate. They do not account for the payment of CMHC Insurance Premiums, applicable sales taxes, closing costs, or other fees that may be required.
CMHC Mortgage Calculator is for general illustrative purposes only. The amounts it projects are based upon assumptions and estimates made according to generally accepted principles for mortgages in Canada. CMHC cannot guarantee the projections. Actual payment amount must be obtained from your lender. Neither CMHC nor any of its advisers shall have any liability for the accuracy of this information.
Mortgage Loan Insurance
Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment of 5% — with interest rates comparable to those with a 20% down payment.
The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on a number of factors such as the intended purpose of the property (owner occupied or rental), the type of loan (i.e. purchase/construction or refinance loan), the ability of a self-employed borrower to supply income verification, and the size of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums. The cost for mortgage loan insurance premiums is usually offset by the savings you get from lower interest rates.
Premium % of Loan
|Up to and including 65%||
|Up to and including 75%||
|Up to and including 80%||
|Up to and including 85%||
|Up to and including 90%||
|Up to and including 95%
Traditional Down Payment
Non-traditional Down Payment
|Extended Amortization Surcharges
Add 0.20% for every 5 years of amortization beyond the 25 year mortgage amortization period.
Note: The amortization cannot exceed 25 years for mortgage loan-to-value ratios > 80%.
|* Premiums in Manitoba (effective July 15, 2012), Ontario and Quebec are subject to provincial sales tax. The provincial sales tax cannot be added to the loan amount.|
Do Your Calculations Look Encouraging?
What is your current financial situation? After doing the calculations, do you feel fairly confident about beginning the home buying process? You’re ready to proceed with home ownership.
Do Your Calculations Look Discouraging?
You may need to step back and make some improvements. Did your calculations show that you might have trouble meeting monthly debt payment? If that’s the case, you may find it difficult to get approved for a mortgage. Here are some things you can do to improve your situation:
- Pay off some loans first.
- Save for a larger down payment.
- Take another look at your current household budget to see where you can spend less. The money you save can go towards a larger down payment.
- Lower your home price — remember that your first home is not necessarily your dream home.
Here are some more helpful strategies:
- Meet with a credit counsellor. He (or she) can help you figure out how to minimize your debts.
- Buy your home through a rent-to-own program. These are sometimes provided by the builder or a non-profit sponsor.
- Find out about programs through which you can help build your own home.
- Ask the housing department of your municipality if any special programs exist.
What are your next steps?
Full article from CHMC Website: Step 2: Are you financially ready?