How Much Mortgage Can I Afford?
Due to the economic crisis and mortgage crisis that swept the United States, not to mention the fact that many people have been concerned about a housing bubble bursting here in Canada. One of the policies that came out of the situation was that the maximum mortgage length was dropped from 35 to 30 years, and then to 25 years.
Even without that change, it still makes sense to think that you might be asking how much mortgage can I afford?When you look at the situation in terms of monthly cash flow, this makes a big difference. As you start thinking about the type of home you want to buy, make sure that you pay attention to the monthly payment, and how it fits into your regular budget.
For most people, the difference in the maximum amortization length shouldn’t be a deal breaker. However, it does force people to pay off their houses sooner. On top of that, it also means that some buyers not might be able to get the same size mortgage. While most buyers will still be able to get a home, though, some fringe buyers will be forced out of the market, since this will increase their debt service ratio and could be the difference between qualifying for the mortgage or not.
If you think that you might not be able to afford a mortgage with a shorter amortization schedule, you should consider some of the options out there designed to help you boost your ability to afford a mortgage:
Home Buyers Plan
One way to make your home more affordable is through the Home Buyers’ Plan, which allows you to borrow $25,000 from your RRSP to put towards your down payment. Your spouse can withdraw $25,000 from his or her RRSP as well. So if you both have saved up enough in your RRSPs, this can be a great way to come up with $50,000 to add to your down payment and reduce your mortgage.
This is a nice bonus, since you wouldn’t normally be able to take money out of your RRSP before retirement. But this is a viable option. When you make a bigger down payment, you reduce the amount that you borrow, also reducing the amount of the monthly payment. It’s a good way to use your assets to purchase a home that is more affordable.
TFSA
Another great way to save up a down payment is to use your TFSA, which now provides $52,000 in contribution room if you were at least 18 in 2009, $104,000 if you have a spouse, that’s also saving up towards your new house. The TFSA is great, since you can take advantage of tax-free growth, and you don’t have to worry about penalties.
Figuring Out How Much You Can Afford
You also need to know how much mortgage you can afford before you raid your registered account for a down payment. There are different rules of thumb that can help you figure out how much home you can afford. Some suggested that you should limit your mortgage payment to 30% of your monthly income.
While the 30% rule can be a good start, the reality is that you need to consider what makes you comfortable. Look at your situation. Consider how much debt you already have. If you have a lot of debt, you need to keep your mortgage payment low. Additionally, you should also consider what might happen if you lose some of your income. You don’t want to have a mortgage payment that is so high that you are worried about defaulting if something goes wrong.
The mortgage rules that the CMHC announced a few years ago will certainly make it more difficult for some to get a mortgage. However, that doesn’t mean that you don’t have a chance at a mortgage. If you put together a decent down payment with one (or both) of the ideas above, and if you can be realistic about how much house you really need to buy, you can qualify for a mortgage and pay it off sooner!
Before you check out mortgage rates, do keep in mind that they are just one factor in mortgage affordability. Sean Cooper came on the MapleMoney Show to discuss the important aspects to look for in a mortgage. Click play to listen to his mortgage expertise.
Best Mortgage Rates in Canada
Comments
“Ninety percent of the clients I see, if they get a raise, the first thing they say is ‘I can get a bigger house or a better car.’ Not ‘I can pay off (the mortgage and car loan) I have now,’” – Andy Williams
It’s also interesting that the refinancing rate is reduced from 90% to 85%. I didn’t know that the refinancing rate was so high in the first place. Most banks only willing to lend you up to 80% of the value of your property.
I do think it’s good to limited the maximum amortization to 30 years.
This is setting people up to have to save, pay more up front and pay off their mortgage sooner. Better for long term goals, but it does sting.
The Loan to Value being changed is interesting.
It puts pressure on people to borrow as much as soon as possible – once rates go up a few percentage points it puts them out of a certain bracket of houses.
Part of the calculation should be a sufficient down payment. A 20% down payment is more appropriate.
25% less than the bank tells you that you can borrow.
Anything above 25 years is simply ridiculous already. I am not sure that removing 35 years as an option will make a big difference. I have not seen the stats though.
The best comment I heard was how it will remove speculation. That I strongly agree with as speculation isn’t all that good at keeping prices affordable.
I can’t imagine myself paying all the money in interest for a 35 year mortgage …
25 years should be the top and please put 20% down at least, don’t stretch yourself too thin!
I always prefer to buy less than I can afford.
Tom,
I thought Canada had a lot more 10/20 year options?
While CMHC may charges a large sum in fees it’s important to note that the fees are rolled into the mortgage. For most home owners who intend to purchase a home to live in for years, CMHC fees do make sense as it allows once to purchase a house sooner, reap the rewards of increase I property value which is an average of 5-6% in Canada for years now as well as allow owners to buy today with a lower interest rate.
The TFSA is like an RRSP, but intended to be used prior to retirement.
Your TFSA withdrawals and growth within your account are not included in your income—they are tax-free.
I should also note that the change in amortization applies to High ratio / insured loans by CMHC and GE. It does not apply to all loans. Some lenders may follow suit but this announcement does not render 35 year amortization terms non-existent. Virata Gamany
Thats quite a steep transition. Taking mortgages often comes down to planning and a well sorted personal enconomy. The Home buyers plan indeed looks like a great option. //Sebastian
Everytime I read posts like this I count my lucky stars that I live in rural Manitoba. My house (which is a 988sq. foot house, with 3 bed, 2 wash, a finished basement, 2 car garage, and a landscaped double lot for a yard) costed all of 95,000. I definitely don’t have all the anemities of an urban environment, but I grew up rurally so it doesn’t bother me at all. My goal is to have my house paid off by 30 and I don’t think I’ll even have to cut my standard of living much to do it. Not only will I save on the cost of the house, but it’s a double whammy because of the interest saved.
I was actually upset at the 90%-85% switch because I am interested in starting up the Smith Manouevre and this makes it less effective.
As a newlywed and someone under 30 who is just starting to look for a home, the idea of spending more than 25 years paying for it is really daunting.
I’m all for the changes that were made but I still think I’m going to shoot for 20-25 years if it’s at all possible.
Then again, living in Toronto that may not ever happen.
Great article, thanks!
Do a 30-year mortgage, not a 15, and try to put in more than the required.
I’m definitely with you on putting down more than required – I think right now it’s a balance of saving as much as possible for a down payment.
Are there benefits to continuing to rent while saving as much as possible for a down payment, rather than buying earlier?
I’m assuming there are pros and cons to that, as you could be paying (hopefully) less directly to your mortgage rather than your rent, but you’re also paying more because you didn’t put quite as much down…
Suppose you are paying $900/mo. in rent. ALternatively, if you were buying, you might initially pay $650/mo. in interest, plus principal. Then you will also pay $200/mo. in property tax. Not to mention that you will be responsible for all maintenance costs, which will easily average over $50/month. That’s also costing you $900/mo. (plus principal payments).
If you can’t make your rent payments, the worst is that your landlord sends you packing. If you can’t make your mortgage payments, you may lose all the principal you invested.
My personal conviction is that it makes the most sense to save up until you can make a significant downpayment.
Do the math for your own situation, and see which looks more affordable.
The Home Buyers’ Plan is great, we used it to purchase our first home almost 2 years ago, wouldn’t have been able to do it without it!
I don’t see a date on this post, I was wondering where this announcement about the maximum mortgage length changing from 35 to 30 years was made?
Thanks!
Kalina… My neighbors just got a 35 yr mortgage in July.
I doubt that too many fringe buyers will be forced out of the market. They might slightly have to downscale their expectations (old home, smaller home, delay renovations), but people will find a way to buy a home if they are even close, and the 35-30 year change doesn’t really make much of a difference.
I took out a 35 year mortgage last year without the 20% down. We did so for a couple of reasons. We’d just had a kid, my job was on the fritz so we wanted to be able to afford the payments on the one salary. We knew in five years I should be making enough that we can change the terms even when factoring in the likely interest rate hike. Secondly when we looked at the payments between a 35 year and a 25 year, we’d have had to pay 250 more per month but only paid 2,000 more towards principle in the five years of our term. It made more sense to pay off more principle by making extra payments and modify the terms in five years when my job was more stable. If something happened we’d sell and our place because of its location and size is very unlikely to lose value. So while some people know whats best for others on here….for some people longer borrowing terms make more sense.
It’s pretty important for people to understand that more than likely mortgage rates will be going up over the next 5-10 years. Cheap credit can’t last forever, I forsee big changes in this department over the next couple of years.
Adrian is absolutely right mortgage rates is going up and cheap credit is running out. This is a great resource to stay in loop, otherwise you could take a big hit economically.
I don’t think shortening the amortization makes a big difference. House hold debt in Canada keeps going up. It is the non mortgage debts that the government should be keeping an eye on!
Hi Tom
I agree with the comments that buying a house is a daunting task. Higher interest rates and shorter amortization periods will icrease your monthly payments.
This is what I suggest:
Buy a house that you can rent out the basement, now you can get additional income to pay the mortgage. You are also now allowed to write off any expenses that are related to the basement rental.
For example if the basement is 50% of the total house area, you can write off 50% of your taxes,interest, hydro, insurance, cable, water, etc.This method allows you to afford a larger mortgage, but do not buy a bigger house just because you can get more money.
Ask an accountant, this is perfectly legal and the savings can be quite large.
What ever happened to just buying a smaller house? We sold our house recently and bought a foreclosure for half the price, cut our mortgage in half and are living pretty well these days…I wouldn’t change a thing. I’m spending more money on my family now instead of giving it to the bank.
I agree with the sentiments to buying a smaller house. I downsized from 3100 square feet with no kids (I was in my foolish youth) to 1800 sq ft with 2 kids. We’re saving a ton more money, and we’re happier in the cozy house.
I think that people once they buy a home, should try and stay put. We are too much about bigger, faster, better. I thought we were finished trying to keep up with the “Jones”. Stay put, save your money.
I think we can calculate our Mortgage ourself by just of our installment paying capacity.
Look on the bright side.. you’ll save a lot more in interest payments by being forced to pay your house off in 30 years verse 35 years. My wife and I put a large sum of money down and bought a house we knew we could stay in for a long time.. nothing too big or too expensive.
I think if I could do it all again. I would have rented longer, and saved more. This is my advice to any young people today. Have a good down payment, about 25% saved first.
I understand why they’ve moved this way… but it also hurts depending on what part of the country you live in. I suspect we’ll see more people renting as a result.
With house prices at all time low i would not be taking up any mortage untill that stat change
interesting post!
These small changes in mortgaging can make big changes for some – in fact it can take some right out of the market. Some of the purposed changes sound ridiculous and could potentially stall or harm our markets – how would that help the entire public if suddenly house prices fell further. Would that not mean more foreclosures? Isn’t it better to keep people in a position so they can afford to buy, isn’t that better for the entire economy?
People with large variable mortgages should be careful, a small increase in interest rates could really hurt them.
RRSP’s are great downpayment options when buying a house. Thanks for the tip on the TFSA.
I agree with the recent changes even though it keeps some people out of the market. Interest rates are bound to climb and these are the people who will be hurt the most.
Great article. Depending on where you live, you can easily spend $5,000 to $8,000 a year maintaining your property. That estimate doesn’t include extra costs, such as replacing appliances when they fail. Think carefully about how much you can realistically afford, and remember that not all of it can be used to pay your mortgage. If you’ve decided you can spend $2,000 a month on a house, remember that the total amount must cover taxes, insurance and maintenance costs in addition to your mortgage payments. Thanks for sharing.