How much can I afford to pay for a home?

To determine ‘affordability’ you will first need to know your taxable income along with the amount of any debt outstanding and the monthly payments. Assuming it is your principal residence you are purchasing, calculate 32% of your income for use toward a mortgage payment, property taxes and heating costs. If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation. Second, calculate 40% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards, lines of credit payments. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders’ usual guidelines. In addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you don’t leave yourself house poor. Structure your payments so that you can still afford simple luxuries.

What is a home inspection and should I have one done?

A home inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components (roofs, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls, etc.) and systems (electrical, heating, plumbing, drainage, exterior weather proofing, etc.). The results of the inspection should be provided to the purchaser in written form, in detail, generally within 24 hours of the inspection. A pre-purchase home inspection can add peace of mind and make a difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A home inspection helps remove a number of unknowns and increases the likelihood of a successful purchase.

What is the minimum down payment needed for a home?

A minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions. In addition to the down payment, you must also be able to show that you can cover the applicable closing costs (i.e. legal fees and disbursements, appraisal fees and a survey certificate, where applicable). Regardless of the amount of your down payment, at least 5% of it must be from your own cash resources or a gift from a family member. It cannot be borrowed. Lenders will generally accept a gift from a family member as an acceptable down payment provided a letter stating it is a true gift, not a loan, is signed by the donor. Where the mortgage loan insurance is provided by Canada Mortgage and Housing Corporation (CMHC), the gift money must be in the your possession before the application is sent in to CMHC for approval. Mortgages with less than 20% down must have mortgage loan insurance provided by either CMHC or GE.

What is mortgage loan insurance?

Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and GE Capital Mortgage Insurance Company, an approved private corporation. This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 80%. The insurance premiums, ranging from .50% to 3.75%, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.

What is a conventional mortgage?

A conventional mortgage is usually one where the down payment is equal to 20% or more of the purchase price, a loan to value of or less than 80%, and does not normally require mortgage loan insurance.

How does bankruptcy affect qualification for a mortgage?

Depending on the circumstances surrounding your bankruptcy, generally some lenders would consider providing mortgage financing.

How will child support affect mortgage qualification?

Where child support and alimony are paid by you to another person, generally the amount paid out is deducted from your total income before determining the size of mortgage you will qualify for. Where child support and alimony are received by you from another person, generally the amount paid may be added to your total income before determining the size of mortgage you will qualify for, provided proof of regular receipt is available for a period of time determined by the lender.

Can I get a mortgage to purchase a home?

Subject to qualification, yes. In fact, even purchasers with 5% down may qualify to buy a home and make improvements to it. For high-ratio financing, both Canada Mortgage and Housing Corporation and GE Capital, insured mortgages are available to cover the purchase price of a home as well as an amount to pay for immediate major renovations or improvements that the purchaser may wish to make to the property. This option eliminates the need to finance the renovations or improvements separately. Some conditions apply. Where the improvements are cosmetic, the mortgage loan insurance premium is unchanged from the standard schedule. Where the improvements are deemed to be structural, the mortgage loan insurance premium is increased by .50% over the standard schedule. For information on mortgage loan insurance premiums see high-ratio home mortgage financing.

Can I use gift funds as a down payment?

Most lenders will accept down payment funds that are a gift from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. where the mortgage requires mortgage loan insurance, Canada mortgage and housing corporation requires the gift money to be in the purchaser’s possession before the application is sent in to them for approval. where mortgage loan insurance is provided by GE Capital this is not a requirement. See ‘what is mortgage loan insurance?’ for further information.

What is a pre-approved mortgage?

A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (usually up to 120 days) and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like ‘written employment and income confirmation’ and ‘down payment from your own resources’, for example. Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range. In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.

Should I wait for my mortgage to mature?

Lenders will often guarantee an interest rate to you as much as 120 days before your mortgage matures. And, as long as you are not increasing your mortgage, they will cover the costs of transferring your mortgage too. This means a rate promised well in advance of your maturity date, thus eliminating any worries of higher rates. And if rates drop before the actual maturity rate, the new lender will usually adjust your interest rate lower as well. Most lenders send out their mortgage renewal notices offering existing clients their posted interest rates. The rate you are being offered is usually not the best one. Always investigate the possibility of a lower interest rate with the lender or another lender. If you don’t you may end up paying a much higher interest rate on your renewing mortgage than you need to.

What is a down payment?

Very few home buyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage the first step in a potentially long-standing relationship. But even with a mortgage, you will need to raise the money for a down payment. The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting. The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.

How can you acquire a home with as little as 5% down?

Most lenders now offer insured mortgages for both new and resale homes with lower down payment requirements than conventional mortgages – as low as 5%. Low down payment mortgages must be insured to cover potential default of payment, and their carrying costs are therefore higher than a conventional mortgage because they include the insurance premium. With all low down payment insured mortgages, you are responsible for: :appraisal and legal fees :an application fee for the insurance :the payment of the mortgage default insurance premium (although the amount of the premium may be added to the mortgage amount).

How can you pay off your mortgage sooner?

There are ways to reduce the number of years to pay down your mortgage. You’ll enjoy significant savings by: Selecting a non-monthly or accelerated payment schedule Increasing your payment frequency schedule Making principal prepayments Making Double-Up Payments Selecting a shorter amortization at renewal

How can you use your RRSP to help you buy your first home?

A longer-term mortgage is worth considering if you have a busy life and don’t have time to watch mortgage rates. Our 4, 5 and 7-year mortgages let you take advantage of today’s rates, while enjoying long-term security knowing the rate you sign up for is a sure thing. If you want to keep your mortgage flexible right now, you can explore a shorter-term mortgage that usually allows you to take advantage of lower rates and save.

What is a fixed rate mortgage?

The interest rate on a fixed-rate mortgage is set for a pre-determined term – usually between 6 months to 25 years. This offers the security of knowing what you will be paying for the term selected.

What is a variable rate mortgage?

A mortgage in which payments are fixed for a period of one to two years although interest rates may fluctuate from month to month depending on market conditions. If interest rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the monthly payment goes towards covering the interest. Open variable rate mortgages allow prepayment of any amount (with certain minimums) on any payment date.

Mortgage interest costs now up over 80% since the start of the BoC’s rate hikes

489 Queen St E Unit 202, Toronto, ON M5A 1V1
Mon - Fri: 9 am - 5 pm, Sunday: CLOSED
(416) 251-5434

By September 13, 2023 Canadian Real Estate

Canadian mortgage borrowers continued to see their interest costs climb in the second quarter, which have now soared over 80% since the Bank of Canada started raising interest rates.

On a quarterly basis, mortgage interest payments were up another 5% in the second quarter to $92 billion, Statistics Canada reported on Wednesday. StatCan noted the pace of growth has slowed compared to the four preceding quarters of double-digit growth.

The data were released as part of the agency’s Q2 national balance sheet and financial flow accounts. These figures represent the increase in interest costs in dollar terms, which is different from StatCan’s per capita measure included in the monthly inflation data, which is up 30% year-over-year.

At the same time, obligated mortgage principal payments were down another 1.1% in the quarter as “interest continued to account for a greater share of households’ total mortgage payments,” StatCan noted.

Mortgage borrowing falls to 18-year low

Overall household borrowing fell to its lowest level since 2020, and the second-lowest level since 2003. Households borrowed $17.1 billion in funds in Q2, extending the trend of slower borrowing demand seen over the past three quarters.

The slowdown was driven by a marked slowdown in demand for mortgage loans, which fell to its lowest point since 2005, Statistics Canada noted.

“Demand for mortgage loans fell amid the Bank’s two rate hikes in June and July,” noted BMO economist Shelly Kaushik. “Looking ahead, elevated interest rates should continue to weigh on mortgage demand in the coming quarters.”

Income gains outpace debt service costs

The total debt-service ratio (total household debt payments relative to personal disposable income) fell slightly to 14.8% in Q2 from 14.9% in Q1, which was its highest point since 2019.

“Stronger growth in aggregate disposable income helped deflate the ratio,” StatCan noted, while adding that income gains were not shared among all income brackets

Kaushik said the jump in household disposable income was powered by the tight labour market, but expects a cooler job market will “likely slow income growth” in the quarters ahead.

“Elevated household debt remains a notable headwind to consumer spending, especially as mortgages come to renewal, leading to an expected slowdown in broader economic activity through the rest of the year,” she added.

Maria Solovieva at TD Economics said that while the report includes some improvements concerning the state of Canadian households in the first half of the year—such as an increase in household wealth rising real estate valuations and strong disposable income growth—they also “mask the pain felt by some Canadian households.”

“The recent rise in debt servicing costs at a time of a still rampant inflation will limit wealth’s contribution to spending,” she wrote. “The Bank of Canada will need to maintain a close watch on household credit performance as higher interest rates continue to weigh on Canadian households this year.”

Other mortgage and real estate highlights

Other highlights from the latest quarterly report include:

Household net worth grew by $256.4 billion (+1.6% from Q1)
Household savings rate grew 0.7% in the quarter, its slowest pace since Q1 2021
Mortgage debt-service ratio (interest only) rose to 5.29% from 5.18%
Debt payments were up 2% quarter-over-quarter, or 16% year-over-year
Value of household residential real estate rose 2% (+$159 billion) due to a rise in real estate prices during the traditionally stronger spring homebuying season

OSFI seeks to address “problem” of fixed-payment variable-rate mortgages

Early-stage delinquencies for all credit products are on the rise: Equifax

Categories

Recent News

Montreal home sales up 25% in April as expected rate cuts prompt recovery: board

Majority of aspiring homeowners awaiting rate cuts before buying: BMO survey

Canada’s latest GDP figures may prompt Bank of Canada summer rate cut: Economists

What mortgage professionals can expect at the upcoming MIC trade show

The prospect of halal mortgages in Canada: What you need to know

Official info: