The CBC recently reported on a couple who extended themselves financially to buy their dream home and are feeling the pressure of carrying a heavy debt. If you're interested in owning a home, this doesn't have to happen to you.
How can you know if you are financially ready to become a first time homeowner or sell your existing home and buy a new, more expensive house? The Canada Mortgage and Housing Corporation has put together a step-by-step guide to help you. The first step outlined below guides you through some simple calculations to figure out your current financial situation, and the maximum home price that you should consider.
If you are going to need a mortgage, an important step in this process is to meet with several different banks and mortgage brokers to see who has the product most suitable for your needs. Remember that lenders may be able to lend you more than you find comfortable dealing with. Calculate what the mortgage will mean to you on a monthly basis and choose an amount that won't keep you awake at night worrying about how to juggle all your expenses. Perhaps your first home won't have absolutely everything you want, but it can be a stepping stone to a future home that delivers all your wants and needs, and gives you peace mind while you're climbing the property ladder.
I can introduce you to several mortgage experts to help you make your mortgage decision as well as assist you with all other aspects of attaining your first home or moving to a larger home.
How Much are You Spending Now?
Calculate Your Household Expenses
Start figuring out your financial readiness by evaluating your present household budget. How much are you spending each month? Knowing exactly how much, will give you a better idea about whether you can afford to become a homeowner.
The CMHC Household Budget Calculator helps you take a realistic look at your current monthly expenses.
Calculate Your Monthly Debt Payments
Do you know how much debt you are carrying? You need this information to figure out whether you are financially ready for homeownership. If you decide to buy a home, mortgage lenders will ask for this information.
Use the form below to determine your current monthly debt payments. Fill in all the figures that apply to you and total them. When you have finished, print the form. If you cannot print, write down the total on a sheet of paper.
|Monthly Debt Payments||Average Monthly Amount|
|Loans for property you own|
|Car loans and leases|
|Personal loans or lines of credit|
Calculate Your Total Monthly Expenses
Your total monthly expenses are your household expenses plus your debt payments. To calculate your monthly expenses, add the total from the Current Household Budget as Homeowner to the total from Monthly Debt Payments form, using the form below.
(Total from Current Household Budget)
(Total from Monthly Debt Payments form)
(Total from Current Household Budget)
(Total from Monthly Debt Payments form)
How Much Can You Afford?
Before you begin shopping for a home, it’s important to know how much you can afford to spend on homeownership. You will want to plan ahead for the various expenses related to homeownership. 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: PITH also includes half of the monthly condominium fees.
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 should 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 gross monthly salary (before deductions)*|
|Your spouse’s gross monthly salary
|Other monthly income (from investments or
other non-employment sources)
|(A) Total monthly income (add up all amounts)|
|(B) Multiply amount (A) X 0.32 = GDS|
|* Gross salary is income before taxes.|
|(A) Total monthly income (A) from
your GDS calculation
|(B) Multiply (A) X 0.40 = TDS|
|Add up your monthly payments for loans, credit cards and other debts|
|Monthly auto payment|
|Monthly line of credit or personal loan payment|
|Monthly credit card payment|
|Monthly student loan payment|
|Any other monthly payments|
|(C) Add up the total monthly payments listed above|
|(D) Subtract (C) from (B) to find the
monthly housing costs you can afford
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.
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 ofCMHC 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 advisors 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), 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
|* Premiums in Manitoba, 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 homeownership.
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?
Get a Copy of Your Credit Report
Before approving a mortgage, lenders will want to see how well you have paid your debts and bills in the past. To do this, they consider your credit history (credit report) from a credit bureau. This tells them about your financial past and how you have used credit.
Before looking for a mortgage lender, get a copy of your own credit history. There are two main credit-reporting agencies: Equifax Canada Inc. and TransUnion of Canada. You can contact either one of them to get a copy of your credit report. There is often a fee for this service.
Once you receive your credit report, examine it to make sure the information is complete and accurate.
If you have no credit history
If you have no credit history, it is important to start building one by, for example, applying for a standard credit card with good interest rates and terms, making small purchases and paying them as soon as the bill comes in.
If you have a poor credit history
If you have poor credit, lenders might not be able to give you a mortgage loan. You will need to re-establish a good credit history by making debt payments regularly and on time. Most unfavourable credit information (including bankruptcy) drops off your credit file after seven years.
Consider getting some credit counselling if you have a history of poor credit or talk to your lender to discuss options.
Get a Mortgage Pre-Approval
It’s a very good idea to get a pre-approved mortgage before you start shopping. Many realtors will ask if you’ve been approved. A lender will look at your finances and figure the amount of mortgage you can afford. Then the lender will give you a written confirmation, or certificate, for a fixed interest rate. This confirmation will be good for a specific period of time. A pre-approved mortgage is not a guarantee of being approved for the mortgage loan.
Even if you haven’t found the home you want to buy, having a pre-approved mortgage amount will help keep a good price range in mind.
Bring these with you the first time you meet with a lender:
- Your personal information, including identification such as your driver's license
- Details on your job, including confirmation of salary in the form of a letter from your employer
- All your sources of income
- Information and details on all bank accounts, loans and other debts
- Proof of financial assets
- Source and amount of down payment and deposit
- Proof of source of funds to cover the closing costs (these are usually between 1.5% and 4% of the purchase price)
That wasn't so bad and it's helped you to get one more step closer to your goal!