Home Buying Step 2
This step guides you through some simple calculations to figure out your current financial situation, and the maximum home price that you should consider.
How Much are You Spending Now?
Calculate Your Household Expenses
Start figuring out your financial readiness by evaluating your present household budget. How much are you spending each month? Knowing exactly how much, will give you a better idea about whether you can afford to become a homeowner.
Calculate Your Monthly Debt Payments
Do you know how much debt you are carrying? You need this information to figure out whether you are financially ready for homeownership. If you decide to buy a home, mortgage lenders will ask for this information.
Use the form below to determine your current monthly debt payments. Fill in all the figures that apply to you, and then press the Calculate button. When you have finished, print the form. If you cannot print, write down the total on a sheet of paper.
How Much Can You Afford?
Before you begin shopping for a home, it’s important to know how much you can afford to spend on homeownership. You will want to plan ahead for the various expenses related to homeownership. In addition to purchasing the home, other significant expenses will include heating, property taxes, home maintenance and renovation as required. Two simple rules can help you figure out how much you can realistically pay for a home. You must understand these rules to understand if you will be able to get a mortgage.
Affordability Rule 1
The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating.
If you are thinking of buying a condominium or leasehold tenure
For a condominium, PITH also includes half of the monthly condominium fees. For leasehold tenure, PITH also includes the entire annual site lease.
Lenders add up your housing costs and figure out what percentage they are of your gross monthly income. This figure is called your Gross Debt Service (GDS) ratio. To be considered for a mortgage, your GDS must be 32% or less of your gross household monthly income.
Affordability Rule 2
The second rule is that your entire monthly debt load should not be more than 40% of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.). You have calculated these on the Monthly Debt Payments form. This figure is called your Total Debt Service (TDS) ratio.
Your Maximum House Price
The maximum home price that you can realistically afford depends on a number of factors. The most important factors are your household gross monthly income, your down payment and the mortgage interest rate. For many people, the hardest part of buying a home — especially their first one — is saving the necessary down payment.
Note: For CMHC-insured mortgage loans, the maximum purchase price or as-improved property value must be below $1,000,000, when the loan-to-value ratio is greater than 80%.
Calculate Your Maximum House Price
Use the Mortgage Affordability Calculator to figure out the maximum home price you can afford, the maximum mortgage amount you can borrow, and your monthly mortgage payments (including principal and interest).
- Interest is compounded semi-annually not in advance. The interest rate is fixed for the term of the mortgage. The interest rate is usually renegotiated at the end of the term of the mortgage.
- Minimum down payment may vary.
- These calculations are approximate. They do not account for the payment of CMHC Insurance Premiums, applicable sales taxes, closing costs, or other fees that may be required.
Mortgage Loan Insurance
Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment of 5% — with interest rates comparable to those with a 20% down payment.
The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums. The cost for Mortgage Loan Insurance premiums is usually offset by the savings you get from lower interest rates.
Do Your Calculations Look Encouraging?
What is your current financial situation? After doing the calculations, do you feel fairly confident about beginning the homebuying process? You’re ready to proceed with homeownership.
Do Your Calculations Look Discouraging?
You may need to step back and make some improvements. Did your calculations show that you might have trouble meeting monthly debt payment? If that’s the case, you may find it difficult to get approved for a mortgage. Here are some things you can do to improve your situation:
- Pay off some loans first.
- Save for a larger down payment.
- Take another look at your current household budget to see where you can spend less. The money you save can go towards a larger down payment.
- Lower your home price — remember that your first home is not necessarily your dream home.
Here are some more helpful strategies:
- Meet with a credit counsellor. He (or she) can help you figure out how to minimize your debts.
- Buy your home through a rent-to-own program. These are sometimes provided by the builder or a non-profit sponsor.
- Find out about programs through which you can help build your own home.
- Ask the housing department of your municipality if any special programs exist.
What are Your Next Steps?
Get a Copy of Your Credit Report
Before approving a mortgage, lenders will want to see how well you have paid your debts and bills in the past. To do this, they consider your credit history (credit report) from a credit bureau. This tells them about your financial past and how you have used credit.
Before looking for a mortgage lender, get a copy of your own credit history. There are two main credit-reporting agencies: Equifax Canada Inc. and TransUnion of Canada. You can contact either one of them to get a copy of your credit report. There is often a fee for this service.
Once you receive your credit report, examine it to make sure the information is complete and accurate.
If you have no credit history
If you have no credit history, it is important to start building one by, for example, applying for a standard credit card with good interest rates and terms, making small purchases and paying them as soon as the bill comes in.
If you have a poor credit history
If you have poor credit, lenders might not be able to give you a mortgage loan. You will need to re-establish a good credit history by making debt payments regularly and on time. Most unfavourable credit information (including bankruptcy) drops off your credit file after seven years.
Consider getting some credit counselling if you have a history of poor credit or talk to your lender to discuss options.
Get a Mortgage Pre-Approval
It’s a very good idea to get a pre-approved mortgage before you start shopping. Many realtors will ask if you’ve been approved. A lender will look at your finances and figure the amount of mortgage you can afford. Then the lender will give you a written confirmation, or certificate, for a fixed interest rate. This confirmation will be good for a specific period of time. A pre-approved mortgage is not a guarantee of being approved for the mortgage loan.
Even if you haven’t found the home you want to buy, having a pre-approved mortgage amount will help keep a good price range in mind.
Bring these with you the first time you meet with a lender:
- Your personal information, including identification such as your driver’s license
- Details on your job, including confirmation of salary in the form of a letter from your employer
- All your sources of income
- Information and details on all bank accounts, loans and other debts
- Proof of financial assets
- Source and amount of down payment and deposit
- Proof of source of funds to cover the closing costs (these are usually between 1.5% and 4% of the purchase price)
Make Your Mortgage Work for You
Your lender or broker will offer you several choices to help find you the mortgage that best matches your needs. Here are some of the most common.
Amortization refers to the length of time you choose to pay off your mortgage. Mortgages typically come in 25 amortization periods. However, they can be as short as 15 years. Usually, the longer the amortization, the smaller the monthly payments. However, the longer the amortization, the higher the interest costs. Total interest costs can be reduced by making additional (lump sum) payments when possible.
You have the option of repaying your mortgage every month, twice a month, every two weeks or every week. You can also choose to accelerate your payments. This usually means one extra monthly payment per year.
Interest Rate Type
You will have to choose between “fixed”, “variable” or “protected (or capped) variable”. A fixed rate will not change for the term of the mortgage. This type carries a slightly higher rate but provides the peace of mind associated with knowing that interest costs will remain the same.
With a variable rate, the interest rate you pay will fluctuate with the rate of the market. Usually, this will not modify the overall amount of your mortgage payment, but rather change the portion of your monthly payment that goes towards interest costs or paying your mortgage (principal repayment). If interest rates go down, you end up repaying your mortgage faster. If they go up, more of the payment will go towards the interest and less towards repaying the mortgage. This option means you may have to be prepared to accept some risk and uncertainty.
A protected (or capped) variable rate is a mortgage with a variable interest rate that has a maximum rate determined in advance. Even if the market rate goes above the determined maximum rate, you will only have to pay up to that maximum.
Use the Mortgage Payment Calculator to find how much and how often your payment will be. Compare options and find one that’s right for you.
CMHC Mortgage Calculator is for general illustrative purposes only. The amounts it projects are based upon assumptions and estimates made according to generally accepted principles for mortgages in Canada. CMHC cannot guarantee the projections. Actual payment amount must be obtained from your lender. Neither CMHC nor any of its advisors shall have any liability for the accuracy of this information.
The term of a mortgage is the length of time for which options are chosen and agreed upon, such as the interest rate. It can be as little as six months or as long as five years or more. When the term is up, you have the ability to renegotiate your mortgage at the interest rate of that time and choose the same or different options.
“Open” or “Closed” Mortgage
An open mortgage allows you to pay off your mortgage in part or in full at any time without any penalties. You may also choose, at any time, to renegotiate the mortgage. This option provides more flexibility but comes with a higher interest rate. An open mortgage can be a good choice if you plan to sell your home in the near future or to make large additional payments.
A closed mortgage usually carries a lower interest rate but doesn’t offer the flexibility of an open mortgage. However, most lenders allow homeowners to make additional payments of a determined maximum amount without penalty. Typically, most people will select a closed mortgage.
Figure Out the Up-front Costs
There are many up-front costs when you buy a home. Early planning will help make sure things go smoothly.
A down payment is the part of the home price that does not come from the mortgage loan. The down payment comes from your own money. You can buy your home with a minimum down payment of 5%, if you have mortgage loan insurance from CMHC. You need a down payment of at least 20% for a conventional mortgage.
The deposit is paid when you make an Offer to Purchase to show that you are a serious buyer. The deposit will form part of your down payment with the remainder owing at time of closing. If for some reason you back out of the deal without having covered yourself with purchase conditions, such as financing, home inspection, etc., your deposit may not be refundable and you may be sued for damages. The size of the deposit varies. Your realtor or lawyer / notary can help you decide on the amount.
Your mortgage lender may ask you to pay for a recognized appraisal in order to complete a mortgage loan. An appraisal is an estimate of the value of the home. The cost is usually between $250 and $350 and must be paid when you contract for those services.
Having an independent appraisal done on a property before you make an offer is a good idea. It will tell you what the property is worth and help ensure that you are not paying too much.
The appraisal should include:
- Assessment of the property’s physical and functional characteristics
- Analysis of recent comparable sales
- Assessment of current market conditions affecting the property
Ask your realtor or other member of your team to help you find an appraiser.
Mortgage Loan Insurance Premium
If you make less than a 20% down payment, you have a high-ratio mortgage. With a high-ratio mortgage your lender will need mortgage loan insurance. Mortgage loan insurance lets you buy a home with a minimum down payment of 5%.
Most Canadian lending institutions require mortgage loan insurance because it protects the lender. If the borrower defaults (fails to pay) on the mortgage, the lender is paid back by the insurer. You pay a premium for mortgage loan insurance. Your lender will add the mortgage loan insurance premium to your monthly payments, or ask you to pay it in full upon closing.
Mortgage Broker’s Fee
You may have decided to use a mortgage broker. The job of the mortgage broker is to find you a lender with the terms and rates that will best suit you.
Home Inspection Fee
CMHC recommends that you make a home inspection a condition of your Offer to Purchase. A home inspection is done by a qualified home inspector to provide you with information on the condition of the home. It generally costs about $500, depending on the age, size and complexity of the house and the condition that it is in. For example, it may be more costly to inspect a large, older, home, or one in relatively poor condition or that has many pre-existing problems or concerns.
Survey or Certificate of Location Cost
The mortgage lender may ask for an up-to-date survey or certificate of location. If the seller has a survey, but it is more than five years old, it will probably need to be updated. You should ask the seller to provide an updated survey, especially if there has been a new addition, deck or fence built close to the property line. If the seller does not have one, or does not agree to get one, you may have to pay for it yourself.
Remember, you must have permission from the property owner before hiring a surveyor to go onto the property. Ask your realtor to help co-ordinate this with the owner. A survey or certificate of location can cost $1,000 to $2,000.
Your lender, lawyer, or notary may suggest that you get title insurance. This will cover loss caused by defects of title to the property.
Land Registration Fees
Land Registration fees are sometimes called Land Transfer Tax, Deed Registration Fee, Tariff or Property Purchases Tax. In some provinces and territories, you may have to pay this provincial or municipal charge when you close the sale. The cost is a percentage of the property’s purchase price. Check on the internet or with your lawyer (or notary) or other team member to find out about the current rates. These fees can cost a few thousand dollars.
If the home has a well, you will want to have the quality of the water tested to ensure that the water supply is adequate and the water is drinkable. You can negotiate these costs with the vendor and list them in your Offer to Purchase.
If the house has a septic tank, it should be professionally checked to make sure it is in good working order. You may negotiate the cost with the vendor and list it in your Offer to Purchase.
Estoppel Certificate Fee (does not apply in Quebec)
This applies if you are buying a condominium unit, and could cost up to $100. Also called a Status Certificate it outlines a condominium corporation’s financial and legal state.
Prepaid Property Taxes and/or Utility Bills
Property taxes are charged by the municipality where the home is located. They are based on the value of the home. The seller may have already paid property tax or other expenses that apply to the time after the house passes into your hands. You need to pay back the seller for taxes and other costs (including items like filling the oil tank).
The mortgage lender requires you to have property insurance because your home is security for the mortgage. Property insurance covers the cost of replacing your home and its contents in case of loss. Property insurance must be in place on closing day.
Legal fees and related costs must be paid on closing day. The minimum cost is $500 (plus GST/HST). In addition, your lawyer or notary will charge you direct costs to check on the legal status of the property.
Depending on your situation, you may have some other initial expenses to consider:
- Moving expenses Whether you’ll be hiring a moving company, or renting a truck and asking friends for help, there are likely to be moving expenses.
- Renovations or repairs Can renovations, or repairs, be delayed, or are some necessary to do immediately?
- Condominium Fees Do you have to make the initial payment for these monthly fees?
- Service connection fees Telephone, gas, electricity, cable TV, satellite TV, Internet, and so on, may charge service connection fees. Some utilities may ask you to pay a deposit.
- Appliances Does your new home come with appliances? Do you already have your own?
- Gardening equipment Will you need to buy gardening equipment, the first summer in your new home?
- Snow-clearing equipment Will you need to buy snow-clearing equipment, the first winter in your new home?
- Window treatments Do blinds, or curtains come with the house?
- Decorating materials Do you want to re-paint or apply wallpaper? Do the floors need to be refinished or re-carpeted? Do you have all the tools you need for redecorating?
- Hand tools Do you have the basic hand tools you’ll need for your new home?
- Dehumidifier Will you need a dehumidifier to control moisture levels?