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.
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!
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