How Much Mortgage Can I Afford?

Unless you are buying your home outright, the current mortgage economy, interest rates and personal income to debt ratio will influence how much mortgage you can afford. 

Several factors involved may increase or decrease your mortgage amount and monthly payments. Six key elements that can impact your mortgage are covered here.

6 Key Elements That Impact Your Mortgage:

• Maximum mortgage amount you qualify for.
• Total amount of your mortgage and payments after costs.
• Changing interest rates.
• Your mortgage term (lending contract term).
• Fixed or variable rate mortgage.
• Mortgage amortization period.

Maximum Mortgage Amount You Qualify For

For a quick mortgage calculation, LoyalHomes.ca has an easy-to-use Mortgage Calculator that gives you an excellent idea of how much mortgage you can afford. 

A Mortgage Specialist can give you a jump start with a pre-approved mortgage and rate hold. The benefits of pre-approval are many, including knowing what funds are available when it comes time to make an offer on your new house.

Mortgage lenders use specific information to calculate how much you can afford toward monthly mortgage payments. The following ratios are a glimpse into the mortgage approval process and may help you develop your own pre-qualifying calculations.

Along with the following criteria, personal and property financial risks and the credit history of anyone who is on the Property Title and Contract of Purchase and Sale will influence the mortgage amount and interest rate you are eligible for.

Gross Debt and Total Debt Service Ratios

Gross Debt Service Ratio (GDSR) and Total Debt Service Ratio (TDSR) are the standard formulas lenders use. CMHC limits GDS to 39% and TDS to 44% ratios.

In simplified terms, yearly debt is divided into your annual income to come up with debt-to-income ratios.

The household income of anyone on the Property Title is added together to come up with a gross annual income. Gross debt and total debt are divided into the annual income to calculate two separate ratios.

Using CMHC’s ratio limits of 39% and 44%, a gross annual income of $100,000 would allow $39,000 of gross debt and $44,000 of total debt.

Calculating Debt

Debt is broken down into two categories. 

Gross debt (GDSR) includes yearly expenses related to your property for a total sum of mortgage principal plus interest, property taxes, heat and 50% of any applicable strata fees. 

Total debt (TDSR) adds all other revolving debt to your property expenses (gross debt) such as car payments, personal loans, line of credit, credit cards or additional payments.

Calculating Income

Anyone on the Property Title can be used to increase annual income. If you need more than one income, this is something to consider when writing your real estate Contract of Purchase and Sale. A co-signer is required to be on the Property Title for their gross income to be included in the annual income calculation.

Hourly or unguaranteed income and hours may complicate mortgage approval, whereas confirmed salary is easily calculated.

Rental income guaranteed from an existing suite or additional accommodation can be factored into the annual income equation. Up to 50% of the total yearly rental amount may be added to your gross annual income. 

According to CMHC, up to 100% of rental income may be used from a secondary suite in a two-unit owner-occupied residence. Your mortgage lender may require written confirmation or a tenancy agreement that guarantees this additional income.

Total Amount of Your Mortgage and Payments After Costs

Outside of the purchase price, a few variables may add to the cost of your mortgage and monthly payments.

Additional fees may increase your overall mortgage amount, such as:

Default Insurance

When your down payment is below 20% of your purchase price, you will be required to purchase CMHC Loan Insurance. This insurance is to protect your lender in the chance you are unable to pay your mortgage. 

The total cost is determined by your purchase price and the percentage of your down payment. For example, if you pay the minimum 5% down payment, the cost of your default insurance will be 4% of your mortgage. This fee can be paid in full or rolled into the cost of your mortgage.

Life & Disability Mortgage Insurance

The option to purchase extra insurance in the case of death or disability is usually given. This insurance is optional and covers the payout of your mortgage in the event of death or disability. Should you opt-in, an additional payment will be charged.

Mortgage Application Fee

The cost of your mortgage application fee or other banking fees will depend on each financial institution and is often rolled into your mortgage. 

Appraisal Report

Your financial institution may require an appraisal to confirm that your property purchase price is accurate and not inflated. Sometimes, the bank will pay for an appraisal report, or this fee may be added to the cost of your mortgage. It is always worth asking your lender to pay for a required appraisal report.

Re-Financing or Renewal Fees

When re-financing takes place before the end of your mortgage term, a penalty fee is usually charged that may be incorporated into your mortgage. This scenario occurs when you sell your home to buy another or re-finance for other reasons.

Property Taxes 

Property taxes are often included in the cost of your monthly or bi-weekly mortgage payment. Your financial institution will take care of paying your property taxes and, in turn, add this amount to your mortgage payment. 

This does not affect the overall cost of your mortgage or the interest charged. It simply increases your payment and is something to consider when deciding how much you can afford each month.

Changing Interest Rates and How They Impact Your Mortgage

Interest rates directly affect your mortgage payments whether you are re-financing or just getting into the real estate market. The Bank of Canada outlines current interest rates and interest rate history. 

Higher interest rates cause higher payments that may adjust the mortgage amount you can afford. Interest rates also impact the total cost of your mortgage over its term. Your Mortgage Specialist can secure a rate hold to lock in your rate for up to 120 days.

As interest rates change, so do your Gross Debt and Total Debt Service Ratios. As mentioned, GDSR and TDSR directly affect the total amount of mortgage you qualify for with CMHC and your mortgage lender.

Changing interest rates can impact your existing payments and/or amortization if you have a mortgage term that will soon be up for renewal. Re-financing at a higher interest rate can spike payments that could result in extending your amortization to keep payments down.

Historically, when mortgage interest rates rise, real estate prices relax, often balancing the cost of a mortgage. A seller’s real estate market can turn into a buyer’s market with rising mortgage rates, as seller’s expectations lower along with buyer demands.

Term, Amortization & Fixed or Variable Mortgage Rates

Understanding mortgage options and terms can save you money, time and stress. The following conditions all work together for the outcome of mortgage stability, monthly payments, and your mortgage life. Each of the following options impacts the other.

Your Mortgage Term

Within the life of your mortgage, there is a term. At the end of your term, the mortgage is payable in full, or another term is negotiated or renewed. A standard mortgage term is up to 5 years but can be longer. When it comes time to re-finance, current interest rates are back in play.

Interest rates are defined by the length of your mortgage term. Theoretically, the longest term carries the lowest risk and often comes at a higher interest rate. The shorter your term, the lower your interest rate will likely be. Within your term, you can choose variable or fixed interest rates.

You may want a shorter term with lower rates when rates are high. When rates are low, a longer-term may be appealing to lock into a reduced rate.

Breaking your mortgage term often comes with a penalty that can be costly. If you plan to pay your mortgage in full, sell your property or re-finance before the end of your term, review the details of your mortgage contract before signing.

Fixed vs Variable Rate Mortgage

Your risk tolerance, the current mortgage economy and interest rates can make the decision between a fixed or variable rate mortgage an easy one. 

How do fixed interest rates compare to variable, and which option is better for you? Will variable rates save money or ultimately cost you more?

Variable Rate Mortgage

Variable rates are tied to the current prime rate and fluctuate with the Bank of Canada. Variable interest rates are often the lowest giving homeowners the option of reduced monthly payments during their mortgage term. Variable rates can give first-time buyers an opportunity to get into the real estate market.

A true Variable Rate Mortgage is where payments stay the same, but the amount of principal paid changes. A higher interest rate means more interest is paid, and a low-interest rate equates to more principal paid. If principal goes into a deficit, payments are usually increased.

An Adjustable Rate Mortgage is where payments fluctuate with the prime rate keeping your principal and amortization safe. Most lenders prefer an adjustable-rate mortgage over a true variable rate mortgage.

A close eye needs to be kept on current interest rates within a variable term. If rates are rising, you may choose to lock into a fixed rate to avoid high payments, most of your payment going to interest or a longer amortization period.

Lenders usually provide the option to convert to a fixed-rate during the mortgage term without penalty.

Fixed-Rate Mortgage

Fixed interest rates offer mortgage and payment stability with fewer concerns over the risk of rising interest rates. Low-interest rates increase the appeal of a fixed mortgage.

A 5-year fixed term offers the assurance of knowing exactly what your mortgage payment will be for the next five years. A fixed term guarantees that your principal payments will remain steady without impacting your mortgage or amortization.

Amortization Period

Amortization is the length or lifetime of your mortgage. What age would you like to be when your mortgage is fully paid-off? When do you wish to celebrate a mortgage-burning party?

20-year, 25-year or 30-year amortization may affect the interest rate your bank offers. The longer your amortization period, the higher your interest rate could be. The higher your interest rate, the more mortgage you pay. 

The Government of Canada states that 25-year amortization is the longest available option when 20% or less of the purchase price is used for a down payment. You may find their article on Canadian mortgage terms and amortization helpful.

Extending your mortgage lowers payments but will cost more in the end; however, when low monthly payments are a priority, a longer amortization period can accomplish this.

Early Payout = Reduced Mortgage

Speak with your mortgage specialist to go over early payout options. Each financial institution has different conditions and flexibility around payments. 

Adding extra to your monthly payments is one way to pay off your mortgage early. These additional payments can be paused or stopped at any time returning to your regular payments. It may wish to know how much of this extra payment goes toward your mortgage principal.

Bi-weekly or weekly payments will payout your mortgage faster than monthly. Lump-sum payments made to your mortgage balance may be an option at certain times. 

So, How Much Mortgage Can You Afford?

As you can see, many variables impact your mortgage and how much you can afford. Your mortgage options can reduce payments, pay out your mortgage early and lower financial stress.

An experienced Mortgage Specialist can help you with mortgage pre-approval and answer any important financing questions you may have.