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How Much Mortgage You Can Afford ?

How Much Mortgage You Can Afford ?


David Doe

Published in

Real Estate

02 Dec 2021

It's helpful to know how much you can afford when looking to buy a house. Calculating a rough estimate of how much mortgage I can afford or borrow is an essential part of budgeting. You must also determine whether you have sufficient cash resources to purchase a home. The funds must come from the down payment made on the property and the closing costs that must be paid to complete the transaction !

With the first tab under the mortgage affordability calculator above, we can help you estimate these closing costs. When you know how much of a mortgage you can afford and how much money you'll need, you'll be able to figure out what kind of house you should be looking for. If you need a real estate broker to answer all of your questions about your mortgage affordability, you can contact us. Please read the information below to learn more about mortgage affordability and how our calculator works !

Mortgage affordability

What is Mortgage Affordability ?

The term "mortgage affordability" refers to the amount of money you can borrow based on your current income, debt, and living costs. When buying a home, it's essentially your purchasing power. Therefore, the more affordable your mortgage is, the more expensive a home you can afford to buy.

Overall housing affordability, which has more to do with the cost of living in a particular city, is also referred to as 'affordability.' If the cost of housing in a city is high in comparison to the average income, it will be perceived as a less affordable place to live. Although the two terms are related, it's crucial to know the difference.

Many factors influence the maximum mortgage you can afford to borrow, including the applicants' household income, personal monthly expenses (car payments, credit card bills), and the costs of owning a home (property taxes, condo fees, and heating costs).

How To Use The Mortgage Affordability Calculator ?

Enter your and your partner's or co-applicant's income, as well as your living costs and debt payments, into our mortgage affordability calculator. If you don't know your living expenses, the calculator can estimate them for you. You'll be able to figure out how much you can borrow using these figures. You can experiment with different amortization periods and interest rates to see how they affect your mortgage affordability and monthly payments.

How To Estimate Affordability ?

How To Estimate Affordability ?

Based on the calculations your mortgage provider will make, there is a rule of thumb for how much you can afford. The general rule is that you can afford a mortgage if your monthly housing costs are less than 32% of your gross household income and your total debt load (including housing costs) is less than 40% of your gross household income. The debt service ratios are the basis for this rule. When determining the mortgage amount you qualify for, lenders look at two ratios that indicate how much you can afford. The Gross Debt Service and Total Debt Service ratios are used to calculate these figures. They consider your monthly housing costs, as well as your overall debt load. According to the Canada Mortgage and Housing Corporation, the first affordability guideline is that your monthly housing costs – mortgage principal and interest, taxes, and heating expenses should not exceed 32 percent of your gross household monthly income, according to the Canada Mortgage and Housing Corporation also covers half of your monthly condominium fees if you live in a condominium. Therefore, your G.D.S. ratio is the sum of these housing costs as a percentage of your gross monthly income.

Your total monthly debt load, including housing costs, should not exceed 40% of your gross monthly income, according to the affordability guideline. Your total monthly debt load would include credit card interest, car payments, and other loan expenses in addition to housing costs. Your T.D.S. ratio is the sum of your total monthly debt load as a percentage of your gross household income.

Gross Debt Service Ratio

[Mortgage payments]

  • Property taxes
  • Heating Costs
  • 50% of condo fees]
  • Annual Income = Ratio (should be < 32%)

Total Debt Service Ratio

[Housing expenses (per G.D.S.)

  • Credit card interest
  • Car payments
  • Loan expenses]
  • Annual Income = Ratio (should be < 40%)

The Maximum Limit

While the general G.D.S. and T.D.S. guidelines are 32 percent and 40 percent, respectively, most borrowers with good credit and consistent income can go above and beyond these limits. Most lenders use a maximum G.D.S. limit of 39 percent and a maximum T.D.S. limit of 44 percent to qualify borrowers. Our mortgage calculator uses these maximum limits to determine affordability. The C.M.H.C. implemented new G.D.S. and T.D.S. limits for mortgages it insured on July 1, 2020. The new G.D.S. limit for CMHC-insured mortgages is 35 percent, and the new T.D.S. limit is 42 percent for CMHC-insured mortgages. Because Genworth Financial and Canada Guaranty, the two other mortgage insurance providers in Canada, did not change their maximum limits, the C.M.H.C. changes will have a minimal impact on borrowers. As a result, mortgage lenders will continue to rely on these insurers' old maximum GDS/TDS limits of 39/44.

Down Payment

Down Payment !

The amount you put down on the house is a criterion for determining your maximum affordability. You can use a simple calculation to determine how much you can afford to spend, regardless of your income or debt levels. If your down payment is less than $25,000, use the following formula to determine your maximum purchase price:

[Down Payment] ÷ 5% = Maximum Affordability

Let's say you have $50,000 in the bank for a down payment !

($50,000 - $25,000) is the maximum home price you could afford !

($50,000 - $25,000) ÷ 10% + $500,000 = $750,000

Any mortgage with less than a 20% down payment is known as a high-ratio mortgage and requires you to purchase mortgage default insurance, commonly referred to as C.M.H.C. insurance.

In addition to your down payment and C.M.H.C. insurance, you should set aside 1.5 percent to 4% of the sale price for closing costs, which are due on the day of closing. Many homebuyers overlook closing costs when calculating their cash requirements.

How To Make Your Mortgage More Affordable ?

  • Save for a larger down payment: The larger your down payment, the less interest you'll pay over the loan's life. You can also save money on C.M.H.C. insurance by making a larger down payment.
  • Improve your mortgage rate: Shop around for the best mortgage rate you can find, and consider hiring a mortgage broker to help you negotiate. A lower mortgage rate means lower monthly payments, allowing you to spend more money. You'll also save thousands of dollars throughout your loan.
  • Lengthen your amortization period: The longer you pay off your loan, the lower your monthly payments will be, making your mortgage more affordable. However, you will end up paying more interest in the long run.

These are just a few options for answering your question about how much of a mortgage I can afford. On the other hand, the best advice will be tailored to your specific needs. Contact Us for more information if you're looking for a licenced mortgage broker near you who can provide you with a free, no-obligation consultation tailored to your specific needs.

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