My financing page gives you everything you need to know to figure out mortgage payments and loan amounts using the built in calculator. If you want detailed information on the subjects covered here see the financing section of my blog. Articles on bridge loans, the Region’s Affordable Home Ownership Program, and more can be found there.
Make sure you enter the right interest rate. It isn’t what your lender is promising. See The Stress Test write up below for more info.
See below for an explanation of the GDS and TDS ratios and use the appropriate ratio to figure out how big a monthly payment you are allowed.
See the Mortgage Size section below for an explanation of your maximum mortgage loan amount.
The rule for mortgage payment size vs. income uses one of two ratios:
The Gross Debt Service ratio limit is 35% of gross income for property taxes, heating, mortgage payments and ½ condo fees (if applicable).
The Total Debt Service ratio is a maximum of 42% of gross income. It’s used if you have existing debt, which is included in the above calculation.
Here’s a great calculator using the GDS and TDS percentages: CMHC debt service calculator.
Once you know how big a mortgage payment you can carry, use that to calculate the maximum amount you can qualify for.
Your mortgage size is determined by three factors; your mortgage monthly payment, your stress test interest rate, and the amortization period.
Once you know the size of your monthly payment you can use the other two variables to figure out just how much you can borrow.
Your time-frame for repayment and the interest rate make a big difference in the amount you can borrow and how much it will cost you in interest. I explain how these factors work in the video below.
In January of 2018, the federal government brought in new mortgage rules. The most significant change was the mortgage stress test.
Buyers now need to qualify at a higher interest rate than what they will actually pay when they purchase. This is being done to limit the amount you can borrow relative to income.
You are now required to qualify at minimum at the Bank of Canada’s 5 year fixed rate, or 2% above whatever rate the bank is offering you, whichever qualification rate is higher.
Being forced to qualify at the higher stress test rate causes the principal portion of your monthly mortgage payment to shrink, lowering the maximum amount you’ll be allowed to borrow for your mortgage.
The rate you’ll actually pay once you buy is the rate you are offered by your lender. Monthly payments and interest will calculated from this lower rate, not the stress test rate.
There are very good reasons for getting a pre-approval. The process shows you exactly where you stand financially. And staying within a budget means you’ll be able to pay off your home in relative comfort.
The approval means you have the bank’s trust and this helps at offer time. Think about it from the sellers viewpoint; two offers, one conditional on financing and the other pre-approved. The offers are the exact same otherwise. Which one would you take?
If you are serious about purchasing a home, get pre-approved. Rates are usually locked in for several months. Put the advantage in your court when making an offer. Know what you can afford and choose accordingly. Be financially smart!