How Much Can I Afford?

 

This is the number one question clients have, particularly first time Buyers who haven't been through the process before.

Use this rule of thumb to see if you'll qualify for a mortgage on your dream home.

1. Calculate the combined monthly before-tax income of you and your spouse.

2. Divide this figure by three. This figure is the monthly payment you can afford to make on your house.

3. Take the total price of the house and subtract the amount you expect to make as a downpayment. This is the total amount you want to borrow.

4. Look at the chart below. Look down the left column and find the current interest rate. Line this up with the amortization period (length of mortgage) of your choice. The most common Amortization Period is 25 years.

The table below shows the monthly payment of principal and interest for each $1,000 you borrow.

 

 %  15 years  20 Years  25 years
 5.25%  8.01  6.74  5.96
 5.50%  8.14  6.85  6.10
 5.75%  8.27  6.98  6.25
6.00%  8.40  7.12  6.40
 6.25%  8.53  7.26  6.55

 

 

5. Multiply this figure by the amount you need to borrow. Divide by 1,000

6. Add to this your estimated monthly heating costs and monthly property taxes.

7. If this figure is equal to or less that the figure you calculated in step 2 above, you should qualify for a mortgage on your dream home.

 

Example: The monthly mortgage payment (Principal and Interest) for a $200,000 mortgage with a 25year amortization at 6% is $1,280

 

 Interest

Rate

Amortization

Period 

Chart

Figure 

Mortgage

Amount / 1,000 

Monthly

Payment 

 6%

 25

 6.4

 200

 $1,280

         
         

 

Mortgage Loan Insurance Premium (non-refundable)
Mortgage insurance makes it possible for homebuyers to purchase a home using a lower down payment. The Canadian Bank Act prohibits most federally regulated lending institutions from providing mortgages without mortgage loan insurance for amounts that exceed 75% of the value of the home or purchases with less than 25% down payment. The Canadian Mortgage and Housing Corporation (CMHC) and Genworth Financial both offer Mortgage Loan insurance.
 

CMHC and Genworth Financial's current Mortgage Loan insurance Premium Rates*:
Loan Size
(% of property value)		 Rate (as a % of loan)
Up to and including 75% (25% to 34.99% down payment)
0.65%
Up to and including 80% (20% to 24.99% down payment)
1.00%
Up to and including 85% (15% to 19.99% down payment)
1.75%
Up to and including 90% (10% to 14.99% down payment)
2.00%
Up to and including 95% (5% to 9.99% down payment)
2.75%
Up to and including 95% Flex Down or Cash Back Equity Owner-Occupancy Program** (5% to 9.99% down payment)
2.90%
Up to and including 100% (0% to 4.99% down payment)
3.10%

 

*An additional 0.2% is added to all mortgages with amortizations of 26 to 30 years.

  An additional .4% is added to all mortgages with amortizations of 31 to 35 years.

  An additional .6% is added to all mortgages with amortizations of 36 years or more.

 

This calculator assumes that financial institutions will not charge any Mortgage Loan insurance Premium if you have more than a 25% downpayment. This calculator assumes that your mortgage insurance premium can be financed by your mortgage, which can greatly reduce the amount of upfront money that is required to purchase a home.

 

**Not all Financial Institutions offer CMHC's Flex Down and Genworth Financial's Cashback Equity Owner-Occupancy Program. Below is a brief summary of these two programs:

    CMHC's Flex Down
    Own your own home sooner by using a wider range of sources for your down payment. If you have a proven track record of meeting your debt requirements and sufficient income to support mortgage loan payments, your lender may be able to provide you with CMHC's Flex Down product. Sources for your down payment can include: borrowed funds, gifts and lender cash back incentives. For more information please see: http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm
    Genworth Financial's Cashback Equity Owner-Occupancy Program
    Some home buyers have an excellent credit history but have not yet saved the required down payment. Others have used their savings to build assets in different ways. Genworth Financial offers mortgage default insurance to both these groups. For more information please see: http://www.genworth.ca/mi/eng/industry_professionals/premiums.asp

    Acceptable loan purpose:

    • Property purchase
    • Purchase Plus and Insured Progress Advance
    • Available for extended amortizations up to 35 years (refer to 30/35 Year Product Overview for premium schedules)

     

    Ineligible loan purpose:

    • Business for Self (Alt A)
    • CreditAssist
    • CreditAssist for Self-Employed
    • Family Plan
    • First Mortgage Owner Occupied 3 and 4 units
    • HELOC
    • New To Canada
    • Secondary homes
    • Vacation Homes
    • Homebuyer 100

  Eligible properties

    • Maximum two units, one of which must be occupied as the principal residence
    • New construction or existing properties
    • Loan-to-value ratio limits: 'Loan-to-value' (LTV) is the relationship between the principal balance of a mortgage and the property value. For example, if you have a house valued at $100,000 with a $90,000 loan, you have a 90% LTV ($90,000 divided by $100,000 = 90%). For one and two units - 95% LTV

 

    Eligible equity sources

    • Lender cashback incentives
    • Equity borrowed from any source that is arm's length to the purchase or sale transaction, including personal loans, lines of credit or credit cards. Loan repayments must be included in the TDS calculation.
    • Gifts or grants from any party that is arm's length to the property purchase transaction
    • Rent to own payments that exceed a reasonable current market rent
    • Down payments may not be paid out of or included in the insured mortgage, including any recovery of lender cashback incentives.

 

    Ineligible equity sources
    Some equity sources are not eligible. These include sources that are not arm's length or that are tied to the purchase or sale of the property, either directly or indirectly. For example:

    • Builder incentives or loans
    • Realtor/ mortgage broker incentives or loans to the borrower that impact the property selling price
    • Loans/ gifts from the seller of the property (the vendor)
    • Third parties that receive payment from the vendor or the builder

GDSR: Gross Debt Service Ratio
Compares the total cost of your monthly mortgage payment, taxes and heating to your gross monthly (pre-tax) income from all sources. The general rule is that these monthly payments should not exceed 32% of your gross income.

TDSR: Total Debt Service Ratio
Examines the relationship between all monthly debts (i.e. mortgage payments, property taxes, cars, credit cards, other loans and obligations, etc.) and your gross monthly income. The general rule is that these total monthly payments should not exceed 40% of your income.

Qualify amount
Shown as "Total monthly payment." This is the total amount you qualify for per month. This amount is the total of "Principal, Interest, Tax and Heat" for your home.


 

 

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We can not and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.


 Now you know what you can afford to spend on your next home. Click here to see what you can buy on your budget.

 

Bear in mind this is a rough estimate only, and other factors can affect your credit worthiness. If you have several other large loans already, you may qualify for less. Also, financial institutions vary in their lending policies. The best way to know exactly what you can afford is to get pre-qualified with the lender of your choice.