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 surge by nearly 70% in the past year

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By June 19, 2023 Canadian Real Estate

Mortgage interest costs have undergone a “dramatic” surge over the past year, having risen by nearly 70% as of the first quarter, according to Statistics Canada.

Since the previous quarter alone, mortgage interest costs are up by 12.6%.

The data were released as part of StatCan’s Q1 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 nearly 30% year-over-year.

The report also revealed that the share of mortgages with an amortization period of longer than 25 years has risen sharply to 48.2%. That’s up from 46% a year ago and 37% in Q1 2021.

Mortgage debt posts slowest growth in 20 years

As further proof that high interest rates are weighing on real estate, total mortgage debt in Canada grew by just $11.2 billion in the first quarter, marking the smallest increase in 20 years.

This was the second straight quarter of slower mortgage borrowing growth, following growth of $16.5 billion in Q4, according to data released this week by Statistics Canada.

The results are down sharply from the record mortgage borrowing that took place over the past two years. The all-time record for mortgage borrowing was reached in Q2 2021 when consumers added $58.2 billion worth of mortgage debt.

The slowdown in Q1 comes despite an uptick in real estate activity in the early part of the year, and as the Bank of Canada continued to increase mortgage rates in January (and again more recently in June).

Household credit market debt (seasonally adjusted)

Source: Statistics Canada

Other mortgage and real estate highlights

Other highlights from the latest quarterly report include:

Household wealth grew by $520 billion (+3.4% from Q4)
This was bolstered by a 3.2% (+$243.6 billion) increase in residential real estate values. This followed three straight quarters of declines in 2022 that caused real estate wealth to fall by 10.1% (-$849.3 billion)

The debt-service ratio (total household debt payments relative to personal disposable income) rose 14.9%
Debt payments were up 3.3% quarter-over-quarter
Obligated principal payments fell 6.8% “as the significant stock of variable rate mortgages likely allowed interest payments to further adjust without a concomitant rise in principal”
Fixed-payment variable rate mortgages accounted for nearly 25% of all outstanding chartered bank mortgages

Debt-servicing costs expected to rise further

Even though overall debt growth slowed, the debt-service ratio continued to rise while debt repayment slowed.

That trend is expected to continue over the course of the year and peak by the second half of 2024 “as interest rates are now expected to rise and remain elevated for longer,” according to Maria Solovieva of TD Economics.

“This will create additional headwinds for households with a high sensitivity to interest rates (such as variable rate mortgage holders) and could result in higher delinquency rates in the future,” she noted, pointing to a rise in missed payments revealed in Equifax Canada’s first-quarter credit trends report.

“This is a relatively new trend as in 2022 delinquencies were more pronounced among consumers without mortgages,” she added. “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.”

New mortgage growth slows as rising interest rates and soft real estate market take effect

Popularity of variable-rate mortgages plummets to pre-pandemic levels

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