Purchasing a home maybe be one of the biggest financial transactions you will make in your life and knowing how much you can afford should be on top of your mind.
Lenders and insurance companies take few factors into consideration when assessing an applicant. The policies do vary from lender to lender and even insurance companied (i.e. CMHC, Sagen and Canada Guarantee). Let’s go through the basic variables that can affect how much you can afford for your next property purchase.
- Credit Score: Knowing your credit score and having good credit history makes a big difference when getting a mortgage. Most of the lenders require credit score of 680 and up for the main applicant, specifically if mortgage is insured (i.e. less then 20% down payment). If you are putting 20% or more toward your down payment then there are more options. Some lenders will allow lower credit score but the debt service ratio or the interest rate will vary.
- Debt Service Ratio: The debt service ration determines how much you can afford based on your total income. For the most part the allowed ration is 39% of the total income for Gross Debt Service (GDS) and 44% of the total income for Total Debt Service (TDS). However on June 4, 2020 Canada Mortgage and Housing Corporation changes their guidelines to 35/42 for insured mortgages. However other insurers (Sagen and Canada Guarantee) still allow 39/44. If you have more then 20% down payment then there are more options and debt service ratio will vary depending on your situation. Here is a link to our Affordability Calculator that gives you an idea on how much you can afford https://www.ratepal.ca/mortgage-affordability-calculator/
- Property use and location: If you are purchasing a rental or investment property the minimum down payment if 20% since those type of mortgages are not insurable. However you get a benefit of rental income that goes towards your total income. In many cases lenders use 50%-80% offset from the rental income after deducting all the expenses of owning a rental property (i.e. property tax, heat, state fees, etc.). For the primary residence your minimum down payment is as low as 5% (on first $500,000) but you would have to pay insurance premiums and it varies depending on which insurance company you go with. The location of the property is also important as so lender will only provide financing for the properties in urban areas. In addition if the property is in remote location and there is not many municipal services the loan to value ration (or how much down payment is required) may be affected.
- Other costs: As mentioned above, the insurance premiums would be the largest part of additional costs depending on your down payment (the premiums can be added to your mortgage). Other additional expenses are conveyancing fees, your portion of utility bill and annual property taxes, appraisal fees and in some cases title insurance. Last but not least is property transfer tax and which vary by location, please follow the link to get estimate on the land transfer tax https://www.ratepal.ca/land-transfer-tax-calculator/
In most cases you can easily estimate how much mortgage you can afford by using our online affordability calculator. To take step further and get pre-approved for your next purchase please completed our application form and we will be happy to assist you with your mortgage need.