When buying a new home, you have to assess how much you can afford. The monthly mortgage payment will depend on a number of factors, such as family income and total expenses. This includes car loans/lease, credit card payments and other expenses like condo fees, property taxes, cost of hydro and heating must all be taken into consideration. Mortgage calculators are a great way to calculate the mortgage payment and are widely available through online through mortgage brokers and financial institutions.
Apart from affordability, you must also calculate the amount of money you will require for the new home. This will include the down payment (up to 20% or higher) and closing costs (2%-3% of purchase price) to complete the purchase.
In addition, the lender will look at the total debt service ratio which is a metric used to assess your capacity to take on a loan. The total debt service ratio, unlike the gross debt service ratio, takes into account housing and non-housing related debts and obligations.
These ratios will be calculated using monthly income, household expenses and total debt burden. Canada Mortgage & Housing Corporation (CMHC), sets out the rules for analyzing affordability: - The amount of payments towards principal and interest, monthly hydro expenses and property taxes – should not be greater than 32% of the gross monthly income each month. In case you are buying a new condo, this includes monthly condo fees too!
- In addition, the total amount of your monthly debt – this includes the costs towards the new house – should not exceed 40% of your gross income each month. The amount arrived at by taking your total debt load each month – which will include home loan, credit card payments, car payments and any other loan payments – as a percentage of your monthly family income will constitute your total debt service ratio.
When you work with a mortgage professional, they will help you calculate what you can afford or you can do a quick check by using a mortgage affordability calculator.
