What Can You Afford?
Here are some ways to help you determine how much you can afford.
Set a Maximum Price Range
- To determine your "affordability"
price range, you must calculate two amounts: the amount of cash you can
afford to put toward the purchase (the down payment) and the maximum
amount of loan (mortgage) you can comfortably carry. Typically,
household expenses should not exceed 35 percent of your gross income.
Put Down as Much as You Can - The
key to getting started for most first-time buyers is the initial down
payment. This is the part of the purchase price you have to put
down as cash (savings). You may be able to buy a home for as
little as five-percent down, but remember that the larger the down
payment, the easier it will be to manage the other expenses such as
mortgage payments, utilities and taxes. An ideal down payment is
25-percent of the purchase price. Keep some cash in reserve though
for unexpected expenses related to a home purchase and typical expenses
such as land transfer tax, legal fees and moving expenses.
Know How Much To Borrow - To
establish the maximum mortgage limit for you, a financial institution or
mortgage broker will determine the monthly payment you can afford by
calculating your debt-service ratio. List all your loans (car,
personal loans, monthly credit card balances). The sum of these
and your mortgage payment (including principal, interest and taxes)
should not exceed about 40-percent of your gross income. The
mortgage payment and taxes should not exceed about 30-percent of your
gross income.
Understand Interest Rates - The
size of the mortgage you can arrange, based on payments you can afford,
depends on interest rates. The lower the rates, the larger the
possible mortgage and the more affordable home-buying will be.
However, there are other variables to consider. How open is the
mortgage? Is it portable? Would prepayment be allowed?
Discuss your mortgage options with your REALTOR®, lender or financial
advisor. Decide what is best for you, establish a limit and stick
to it.
Look At Other Sources of Funds -
If you have been contributing regularly to an RRSP (Registered
Retirement Savings Plan) you may have to look no further for your down
payment. The federal government's RRSP Home Buyers' Plan
allows eligible taxpayers to withdraw up to $20,000 per person ($40,000
per couple) tax free from their plan to buy a qualifying home.
However, you are required to pay back every year at least 1/15th of the
amount taken out until it is all paid back, or there will be penalty.
The Canada Mortgage and Housing Corporation's (CMHC)
five-percent-down mortgage program is available to both first-time
buyers and those who have already owned a home. This benefits
buyers who can afford the monthly payments but would have trouble saving
for a larger down payment. Under the program, CMHC may insure the
mortgage on your home for up to 95-percent of the lending value.
An insurance premium of about 2.75-percent of the mortgage loan is
charged. This amount can be added to the mortgage or paid on a
monthly basis.
Other sources of funds you can tap into for a down payment include
savings & investments or gifts from your family or relatives.
< Back To First Time
Buying
|
