Mortgage Affordability Calculator
How does a calculator show my loan affordability?
To be a Homeowner, you need to be able to afford a mortgage. Your capability to make mortgage payments will be dependent on your current and past history with many aspects a mortgage relies on such as your credit history and your plan on where to live/what to buy.
The following factors need to be plugged into our mortgage affordability calculator to estimate the credibility of responsible home ownership.
Where do I want to live?
Where you want to be located can have a large impact on the price tag of your future purchase. You need to aware of the kinds of neighborhoods that may be pricier than others.
A general rule of thumb is the closer you get to the city centre or the downtown area, the price per square footage of your home will increase. As the price escalates, the more likely amenities will be available within a short drive or even walking distance of your Home.
Beyond the core are the houses constructed on the outskirts of the city/town. The properties located in these areas cater to the lifestyles of a rancher or farmer with their livelihood situated in the country or perhaps a person looking for a secondary Home in a quieter space.
These properties are also pretty expensive due to the land taxes that are measured per square foot.
What kind of Home do I want?
When looking for your own space, you might be confused as to what type of Home you should be purchasing that best suit your needs.
Are you looking for a single-family house, duplex, a condo? There are many other options however, we are going to focus on the most popular Homes for Calgary residents.
A single-family Home is a detached house that can stand on its own. It is a very basic house that you would drive by through a neighbourhood. This type of property can be great to start a family in or for people looking to have something more private.
With the benefit of having more space, the disadvantage is the amount of property costs, property taxes and maintenance for a single-family Home that will come out of your pocket in comparison to a duplex or a condo.
Duplexes tend to have a lower purchase price which is great for first-time Home buyers or individuals that don’t mind sharing walls with neighbours.
The idea of sharing a wall can be daunting to some therefore it is important to tour the area before officially agreeing to move in. Older models do not have the same building structures as modern duplexes and as a result, they might have thinner walls and not as much insulation.
Developed duplexes these days concentrate on many aspects a regular house will have such as:
- Large windows allowing natural light to come through
- Built-in patios (on the front and/or back of the property)
- Access to a backyard (a huge plus for pet owners)
- Single-vehicle driveways or garages attached
A condo is a private residence building that is filled with multiple units. While living in a condo, you will be required to pay a monthly fee that is assessed by the condominium association. This fee covers the cost of maintenance, repairs, and security of the buildings and surrounding common areas.
Most condominium tenants enjoy the security of living in a private building. This added safety feature is a reason why older Canadians prefer a condo over a smaller family-Home or a duplex. It's also a decently sized space with little to no maintenance.
A condo is a great option for an older person or couple wanting to downsize their lifestyle. Many if not all condominiums allow visitors to come stay with their loved ones so they will not feel isolated in their new Home.
How much should I save?
Mortgage affordability will look at your current annual income before tax. This is important to look at because it determines whether or not your income can adjust and add mortgage payments to your monthly obligations.
The only to ensure a payment will go through is by putting away a certain amount of your paycheque specifically for your mortgage.
By using the mortgage affordability calculator, you can determine approximately how much you should save and put away for your monthly payment.
What about my current debt?
Having a high level of debt can affect how much mortgage you can afford. Mortgage lenders prefer to work with potential home buyers with low debt levels because that indicates to them that those low-debt applicants pay their bills on time.
Adding a mortgage payment to a huge stack of bills may be a stressful idea therefore you need to know how much debt you have in comparison to your income.
To calculate your debt to income ratio, you need to add up all your mandatory monthly debt payments and divide them by your gross monthly income. This is money earned before deductions.
The list of your monthly obligations is a sum of the following:
- Mortgage payments
- Vehicle payments
- Credit card payments (minimum payment)
- Student loans
- Child support/alimony payments
- Other payments
Your debt-to-income ratio should NOT exceed 43 per cent. A mortgage lender may not consider you for a loan at that high risk level.
Do I need to make more money?
As previously said, your annual net income is a factor when considering how much mortgage you can purchase. If you’re on the lower end of the money-making spectrum, taking on a smaller mortgage is a smart move to ensure consistency in your payments.
However, if you are wanting to secure a mortgage that is currently out of your field. You have the opportunity to earn extra income by indulging in a side hustle. There are many different ways to get cash fast whether that is:
- Signing up as a delivery driver for a company like DoorDash or Skip the Dishes
- Apply to be an Uber driver when you're not working your main job on evenings, early mornings, or weekends
- Listing yourself as a local dog walker or dog sitter
- Selling your unwanted items at consignment stores, pawn shops or online classified such as Kijiji or eBay
What is my borrowing power?
A frequently asked question buyers tend to ask is “What can I afford to borrow?”or “What should my price range be?” The amount of money you can borrow will be determined by your current financial circumstance. This includes your income, debt, personal spending and credit score.
You have the ability to borrow a mortgage loan that is equal to 95% of the property value. This percentage is not a guarantee but is a variable depending on your lifestyle, lines of credit, debt level, etc.
How much should my down payment be?
A down payment is the initial payment required in order to purchase a Home. This money is deducted from the purchase price of the Home while your mortgage loan covers the rest. This initial cost confirms your severity about the purchase.
Canadians are required to put down a minimum of 5% on a property costing less than $500,000. Anything more will require 5% for the first $500,000 of the purchase price followed by 10% for the rest.
Purchase Price = $600,000
- First Part of the Purchase Price ($) = $500,000
- Minimum Down Payment (%) = 5%
- Minimum Down Payment ($) = $25,000
- Remaining Purchase Price ($) = $100,000
- Minimum Down Payment (%) = 10%
- Minimum Down Payment ($) = $10,000
Minimum Down Payments ($25,000) + ($10,000) = $35,000
Total Minimum Down Payment = $35,000
If your down payment is less than 20% of the price of your Home, you are required to purchase mortgage loan insurance also known as default insurance.
Mortgage default insurance protects the mortgage lender in case you’re not able to make your mortgage payments. It is not meant to protect you.
If you’re self-employed or have a poor credit history, you may be required to purchase mortgage loan insurance even if you have a 20% down payment.You are not required to purchase default insurance if your down payment is more than 20% or if the cost of your Home is more than $1 million.
As a first-time home buyer, you have the ability to borrow up to $25,000 from your RRSP towards your down payment if you meet the qualifications.
What happens now?
If after using the affordability calculator you don't like the numbers, you will have to determine how you can change your results. Need any help? Contact HomeHow Mortgage for a free consultation on next steps.