Tighter mortgage rules make it more imperative than ever that homebuyers determine just how much they can afford before applying for a home loan. The new regulations are expected to affect the amount that borrowers can qualify for, as well as the interest rates they will be charged.
The real estate market is expected to experience a slowdown in the coming year, with real estate prices in most parts of the country flattening out and some selected markets seeing prices as well as sales activity declining. Some parts of the country may also see price gains, although these will be at a slower rate than recent years.
The easiest way to determine home affordability is to use a mortgage calculator. These online tools are available to use for free on many sites and will compute how much your monthly payments (principal and interest) will be based on the price of the property as well as the expected interest rates and other factors. You can also use the calculator to compare different mortgage products to determine which one would provide you with the best overall value. To ensure that you get the most accurate results, however, make sure that you have all the relevant information ready before you fill in the fields required.
Property Taxes And Mortgage Insurance
Also a factor in affordability are property taxes and mortgage default insurance. Mortgage insurance is computed as a percentage of your mortgage amount, but is required only on loans with a less than 20% down payment provided. All provinces charge a land transfer tax, which is computed as a percentage of the property’s purchase price, and whose rate varies depending on the province. Some municipalities may also charge an additional LTT, which is computed in a similar fashion.
Apart from these, there are some indirect costs you will have to keep in mind. For example, the cost of repairing the property will have to be taken into account when determining its affordability, as well as recurring maintenance costs.
Gross Debt Service and Total Debt Service
You should also compute your Gross Debt Service and Total Debt Service, since these ratios will also factor into affordability, as well as whether or not you will be approved for a mortgage.
The GDS computes how much of your monthly income will go towards servicing home-related expenses, including heating costs and property taxes. In general, mortgage lenders will only consider you for a loan if your GDS is below 32 percent. A GDS that exceeds this benchmark means that you will have less money for other household expenses.
Your TDS computes how much of your monthly income goes towards paying off your debts. These include consumer debts such as credit card debt, student debt, car loans and personal loans. Ideally, the TDS should be no more than 40% of your monthly income.
If your computations indicate that you cannot afford a home at this time, there are some steps you can take to ensure that you can buy in the future. For instance, you can save up for a down payment. The higher the amount you can put down, the more likely buying a house will be affordable, since it will reduce your monthly payments and insurance costs.