Determining Mortgage Payments You Can Afford

By Arthur Favier

It's the end of summer and you're finally ready to start shopping for a new home. You've looked at prices, evaluated neighbourhoods, and now it’s time to sit down and crunch some numbers to figure out the maximum monthly mortgage payments you can afford.  

Do I have enough saved for a down payment?

Banks and other lenders consider your down payment just as important as your credit history when determining whether or not to approve you for a mortgage. They’re both indicators of how reliable you are with your finances — and they want to make sure you can put at least a 20 percent down before you start shopping for a house.

You may be able to find a lender willing to loan you up to 95% of the price, but you’ll be paying high interest rates. Plus, the bank isn’t going to help you with any problems that may occur during the loan period.

Still, you shouldn't spend all your savings on a down payment. Save some for repairs and emergencies, because surprise costs happen in every house.

How much should I pay each month?

There are several ways to figure out how much you can afford monthly. The standard rule is to not spend more than 28% of your gross monthly income on your mortgage payment, including taxes and insurance. You can also use the 35-40 guideline for debt to income ratios. This rule states you should pay no more than 35% of your gross monthly income for housing and no more than 40% total debt-to-income ratio.

Do I have enough for closing costs?

Before you apply for a mortgage, be sure to have enough cash on hand for the closing costs. You’ll need money for:

• Land transfer tax
• Legal fees
• Title insurance
• Property appraisal
• Land survey fees
• Inspection fees
• Property insurance
• Moving costs

The average closing costs in Ontario range from 1.5% to 4% of the total purchase price. For example, closing costs on a $500,000 property would range from $7,500 to $20,000.

What are my current living expenses?

It's not advised to become "house poor", which is what happens when homebuyers purchase a property then can’t afford anything else. Don't forget about the day-to-day costs of living in Canada. From groceries to gas to your morning coffee — expenses add up quickly! Make sure that you won't be stretching yourself too thin with your mortgage payments.

Am I expecting a lump sum of money in the near future?

If you’re expecting a promotion or inheritance, you might want to hold off on your home search until you have it. A lump sum of cash can help ensure you have a larger down payment and ultimately can negotiate a lower interest rate.

Am I set on a particular neighbourhood?

Some neighbourhoods are more expensive than others. Considering moving outside of hot real estate pockets can save you thousands on a property, ultimately lowering your monthly payments. If you’re willing to commute, being flexible on location can be a smart choice.

What is my qualifying rate?

Every bank has its own lending standards, but they all abide by federal laws. To ensure that you’re within federal lending guidelines, contact a mortgage broker or bank and ask your mortgage representative. The representative will be able to give you the qualifying rate for the lender at the time of your application. The rate provided to you can largely impact your monthly mortgage payments.  

Lenders really appreciate honesty about any extenuating circumstances you may have in your financial history, including missed payments or credit card debt. Remember, these matters don’t necessarily mean that you’re less able to pay back your mortgage. However, lenders want to ensure you’ll be able to handle the monthly payments and the home expenses for the entirety of the term.

How to choose a bank or lender

Most people have a fairly firm idea of what they want when it comes to their mortgage. However, the process of buying a home — or even refinancing one — can be confusing and difficult. That’s why it’s important to choose the right lender. 

There’s nothing worse than getting a loan that’s too expensive and difficult to afford. And it’s not always easy to choose the right mortgage provider or lender. You want to make sure you choose the right product as well as the right company to service your mortgage.

When looking for a good mortgage lender, you have several options. You can go through a bank or credit union to obtain the loan, but first consider talking with some other financial institutions. For example, your friends and family may know of other professionals you could work with. Additionally, some experts will recommend that you talk directly with lenders to see what they are offering.

What to do if you want more than you can afford

If you want to buy a certain home, but it's too expensive for your budget, you have more options than simply walking away from that dream. You could spend a bit more time renting an apartment or condominium to save more money, for instance. 

Buying a home is one of the biggest financial decisions you’ll ever make and you certainly don't want to buy a home that you can't afford.

If you decide to revise your budget and live more modestly for a few months so you have enough leftover at the end of each month to pay the mortgage on that dream home, then why not give it a shot?  The key is to be both realistic and optimistic about your future financial situation.