Calculating how much you can afford
If you are entertaining the idea of buying a new home, the first question you ask yourself is likely: “how much can I afford”? If you haven’t already, take an inventory of your monthly expenses, savings and income. This exercise will give you an idea of how much you have for a down payment and what monthly mortgage payments fit within your budget.
Are you looking for some guidance? The rule of thumb for mortgage indebtedness is where your monthly housing costs are no more than 32% of your gross household income and where your total debt (including housing costs) is no more than 40% of your gross household income.
Use a mortgage calculator tool to calculate monthly payments with different interest rates and down payments.
Get pre-approved before heading out to look for a home
Obtaining a pre-approval mortgage is an extra step that will give you the confidence of knowing what you can afford and how much the bank will lend you. Plus, when you are pre-approved, sellers will see you as a serious buyer.
You can obtain a pre-approval mortgage from your bank or a mortgage broker. Be prepared for questions about your annual income, type of employment and other financial inquiries.
Should I go with a bank or a broker?
In the past, it was typical for potential homebuyers to visit their local bank to secure a mortgage. Although many Canadians still deal directly with their banks, mortgage brokers are becoming increasingly popular. They offer more lender options and, in some cases, better interest rates.
Mortgage brokers work with a variety of lenders. A mortgage broker shops lenders to find you the best possible mortgage for your needs. Their fees are paid by the lender, not by the customer. If you don’t fit the criteria for a conventional mortgage, or you want to shop rates, a mortgage broker may be the best option for you.
If, however, you have a pre-existing relationship with your bank, you may be able to negotiate a very competitive rate and keep all your financial services under one roof. The choice is always yours.
What type of mortgage should I choose?
There are many types of mortgages, and no one is better than the other. A decision on a type of mortgage is based, among other things, on your financial goals, the market conditions, and your outlook on debt.
Variable or fixed?
If you’re looking for a more affordable rate for your mortgage, you’ll likely want to choose a variable mortgage. With a variable mortgage, your interest rates will fluctuate depending on the market, but historically variable mortgages are less expensive.
If you want to pay the same amount each time and not take a risk on the market, you’ll likely want to choose a fixed mortgage rate. Whether the rates rise or fall with changes in the market, you’ll pay the same amount each month. The downside is you’re paying more of a premium for that stability and protection from an unpredictable market.
There are many factors to consider in choosing a mortgage. That’s why you should make this decision with a professional, whether that is a bank manager or a mortgage broker. They will be happy to help you evaluate the pros and cons of each type of mortgage.