You’re 29 years old. You’ve been in a solid job for a couple of years and your partner has a good job, too, giving you a gross household income of $125,000 a year.
The housing market has recovered after the dip caused by tougher lending rules and prices continue to rise, so it might be time to act and leave renting behind. Interest rates are holding steady at still-low rates. And your parents are ready to gift you a healthy down payment.
Now it’s time to determine how much you can afford. Online mortgage calculators, of which there are many, will provide a rough idea. And this is where many people start. You could click on RBC Royal Bank’s calculator and punch in the numbers, which include your income and debt information. Other sites may ask for slightly different numbers, but the process is generally the same.
Your magic number for buying is $505,000. With a down payment of $75,000, a 25-year amortization and a five-year locked-in rate of 4%, your monthly mortgage payment will be $2,310.
While this may seem doable, mortgage professionals highly recommend more work be done before heading out to find that dream home. And they caution against jumping right to the maximum mortgage potential.
“We don’t want to put someone into a house just because it’s their maximum,” says Jennifer Bissonnette, a mortgage specialist at RBC. “You want to leave some wiggle room. You don’t want to live just to pay your mortgage.”
Online calculators are good tools, but they aren’t always realistic, agrees Laura Parsons, a financial expert at BMO Bank of Montreal. “It’s good to go there and have an idea. But there are many other components to consider.”
A chat with a mortgage professional will help put things in perspective. You might be asked about your plans to start a family, how much you are contributing to your RRSP, what your career goals are, how old your cars are.
This conversation will get you thinking about whether you really want to borrow $439,000, which includes the mortgage principal and mortgage default insurance. You should also consider the ramifications of rates rising in the future.
“Maxing out your borrowing is not always where you want to be,” Ms. Parsons says. “You can’t see into the future, but you have to have some idea of what to prepare for.”
There will be property taxes, homeowner’s insurance, utilities and regular maintenance. There may be emergencies, such as a leaking roof, a broken furnace or a flooded basement. There could be landscaping, snow removal costs or condo fees. All this needs to be rolled into the budgeting process. “You may have to buy a lawnmower,” Ms. Parsons says with a laugh. “A lot of people don’t think about these things.”
Mary Stergiadis, principal for Ontario business development at Canada Mortgage and Housing Corp., explains some guidelines for determining a target home price.
There’s total shelter costs, which include month-ly payments for principal and interest, taxes, heating and half of a condo fee, if there is one. (According to industry standards, half of the fee is seen to represent true shelter costs, while the other half includes things like condo maintenance.) This total is divided by monthly gross household income. As a general rule, the total monthly housing costs should be no more than 35% of gross household monthly income.
Then there is the total debt-servicing-ratio calculation, which adds other monthly debt payments to shelter costs. This total is divided by gross monthly income. Again, as a general rule, servicing these costs should be no more than 42% of gross household income.
CMHC has a suite of online calculators to help homebuyers crunch the numbers. “If they are over the ratios that are allowable within the industry, they would have to look at lowering the mortgage,” Ms. Stergiadis says.
At this point, you might think a less expensive property might be more reasonable. But it sometimes happens, though less often, that people find they qualify to borrow more than they expected. Once a target price has been established, it’s time to apply for a pre-approved mortgage.
A pre-approval will help you refine the process and know exactly what you have to work with when you find the right place and are ready to make an offer. A pre-approval entails a credit check and information such as the rate being offered (usually locked in for 120 days), as well prepayment options. Ask for details about such closing costs as land transfer taxes and legal fees.
A word of caution: A preapproval is not a final approval, so make sure you know what the condi-tions of getting final approval are and that you can meet them. If you go out and lease a new Mercedes before closing, you could end up with a nasty surprise about your ability to qualify. And don’t forget to save a little for that new lawn mower.