How Much Can You Afford?
How much you can afford will affect your home buying options. There are several key factors that impact how much you can borrow, namely:
- How much of a down payment you will make towards the home.
- Your credit rating which affects the interest rate you’ll be charged.
- Your “mortgage affordability” calculation.
Below are general guidelines and rules of thumb that help you understand what factors and calculations determine how much you can borrow.
Any home purchase with less than a 20% down payment is a high ratio mortgage which requires CMHC mortgage insurance. The minimum down payment for any mortgage under $500,000 is 5%. The minimum down payment is 10% on the portion of the mortgage balance that’s above $500,000. Mortgage insurance is only available on properties with a purchase price below $1,000,000.
CMHC’s mortgage insurance premium varies between 0.5% to 4% on the value of the loan. The lower the down payment, the higher the insurance premium. The CHMC insurance premium is typically worked into your mortgage payment. The absolute cost on a high ratio mortgage can be significant so be aware of that.
Your down payment is a critically important factor that directly impacts how much you can borrow.
Your credit history is captured in your credit rating. TransUnion and Equifax are the two main credit bureaus that collect, track and share information about how you use debt/credit. It’s always a good idea to review your credit history and credit score with a qualified mortgage lender to make sure it’s accurate and up to date. Your credit score has a direct impact on the interest rate you will be charged. Interest costs on a mortgage over 20-25 years are substantial.
If required, a good mortgage broker can even help clean up and optimize credit ratings with enough lead time.
Mortgage Affordability Calculation
The rule of thumb is that lenders look at two ratios to determine how much of a mortgage you could qualify for. The two ratios are as follows:
Below is a mortgage calculator for you to test various scenarios if you are exploring different financing options.
If you are looking for a more definitive answer on how much can you afford, make sure to speak to at least one mortgage specialist. Shop around for the best rates and terms on a mortgage. The potential savings are well worth the work. If you need names of some outstanding independent mortgage brokers, don’t hesitate to contact me.
My Recommendation to Any Buyer
Before getting too deep into the home search process, I strongly recommend that you get a pre-approved mortgage from your lender of choice. A pre-approved mortgage is a written commitment “in principle” from a mortgage lender that spells out the maximum you can borrow, your monthly payment and the interest rate you’ll be charged. A pre-approved mortgage costs you nothing and does not commit you to anything.
With a pre-approved mortgage you know exactly what you can afford and you are ready to pounce on any great buying opportunities as they pop up.