Are you planning to save for a property? Congratulations! But you may be a little overwhelmed by the magnitude of the task ahead. From finding the right home to deciding how much you can afford to spend on it, there are many steps to take.
Let's take a look at that last step. How much can you borrow to buy a home? To answer this question, you'll need to look at several indicators.
How to calculate your loan amount?
Calculating your loan amount includes:
- Clarifying your project;
- Taking stock of your income and expenses;
- Meeting with mortgage experts.
Clarify your expectations
The first step is to clarify your investment goals.
For starters, why do you want to buy? If you want to buy a primary residence, but you're not sure you'll be living in the same place forever, it may be a good idea to look a little further into the future. For example, by making a purchase that would also be suitable for a possible rental investment at a later date. For this purpose, the property could be:
- Located in a dynamic city such as Montreal or Quebec City;
- Within walking distance of shops and amenities;
- Have a parking space or be close to public transportation.
Are you buying alone or as a couple? The answer to this question will help you determine your mortgage borrowing capacity.
How much can I borrow with my salary?
Sooner or later, you're going to have to ask yourself this question in the process of buying a home. While it's true that your salary determines how much you can borrow, other factors may also come into play.
Take it a step further and ask yourself if you have any other recurring monthly income or expenses that could affect your mortgage calculation.
If you're planning a rental investment, you'll also need to factor in the costs associated with your current home. In the case of a joint loan, the person who accompanies you in your project will have to make the same assessment of his or her situation.
Define your mortgage borrowing capacity with a professional
The next step in determining how much you can borrow to buy a home is to talk to mortgage professionals. They can be:
- An advisor at your financial institution;
- A mortgage broker.
What are the lender's financing criteria?
Credit rating and down payment are two important criteria that allow the bank to verify your ability to borrow.
Credit Rating
The credit rating, which is determined by your financial institution, is the indicator on which it will base its decision to grant you a mortgage. In particular, it reflects your ability to manage your day-to-day finances.
The down payment
The down payment is the amount of money you're willing to put toward your purchase. Its amount can affect the value of the property you can buy with your mortgage. It can also make things easier if your credit score isn't in your favour.
The role of the mortgage broker
Another alternative is to use a second type of mortgage expert who is used to this type of procedure. Such assistance can be provided by a mortgage broker.
He or she can provide you with valuable information, such as the mortgage rates charged by financial institutions, the loan term that's right for you, and the down payment you'll need to make to obtain more advantageous loan terms.
Calculate the potential mortgage yourself
Calculating a mortgage yourself can be useful in two situations. If your investment project isn't completely concrete, or if you want to get a clearer idea of your financial capabilities before taking the plunge.
Before you make an appointment with a professional, there are many resources available to help you estimate your borrowing capacity. However, these estimates are only meant to give you a rough idea and are not a substitute for professional advice.
Calculate how much I can borrow with an online calculator
Many lenders offer online mortgage calculators. XpertSource.com offers a mortgage calculator to give you a better idea of how much you can afford before you take the plunge.
To get an overall picture of your situation, you'll need to enter your gross annual income, the down payment you can afford, and your daily living expenses:
- Paying off a car loan;
- Paying energy-related costs, such as heating in the winter;
- Going out: restaurants, discos, trips, etc.
Calculate GDS and TDS to anticipate mortgage payments
There are two ways to calculate your debt-to-income ratio so you can consider the mortgage you might qualify for:
- Gross Debt Service (GDS);
- Total Debt Service (TDS).
The first method compares the amount you pay each year for your home to your income over the same period. For a lender to approve a loan, this ratio must be between 32% and 39%. This is the percentage of your gross annual income that can be used to repay a mortgage or pay rent.
A second ratio can then be calculated: Total Debt Service (TDS). This is calculated by adding the TDA to your total living expenses. In this way, we can determine whether you will be able to repay the mortgage.
Together, these ratios cannot exceed 44%. Once you've reached this figure, you're guaranteed to be able to pay for both your housing costs and your daily living expenses.
Finally, it's difficult to know how much you can borrow without taking stock of your situation. Calculating your mortgage borrowing capacity is therefore linked to many different parameters that can be taken into account and effectively measured by a mortgage professional.
Are you looking for a mortgage?
XpertSource.com can help you in your efforts to find a mortgage broker. By telling us about your project, we will refer you to top-rated experts, free of charge! Simply fill out the form (it only takes 2 minutes) and you will be put in contact with the right experts.
