If you’re in the market to buy a property, financing becomes a central question. When preparing your loan application, the key consideration is how much of your income should go towards the mortgage.
What percentage of your financial means should be committed to mortgage payments. We’ll provide you with straightforward answers.
Calcuate your mortgage borrowing capacity
Before proceeding, it’s essential to evaluate your current financial position. Understanding exactly how much you can comfortably allocate towards your mortgage payments is a crucial step in the assessment. Consider the following factors to gain a clearer understanding of your situation.
Your income
- The down payment: The amount you’re willing to contribute. While it’s generally advisable to provide 20% of the purchase price, you can get a loan with a smaller down payment.
- Your household income: How much do you earn? Are you applying for the loan individually or with a co-borrower? Ensure to include all sources of income.
Your expenses
- Daily expenses: such as groceries, fuel for your vehicle, dining out.
- Credit card debt: any outstanding balances.
- Costs associated with future purchases: monthly mortgage payments, property taxes, insurance premiums, condominium fees, and maintenance.
Once you’ve assessed your financial situation, obtaining a mortgage pre-approval is recommended. This helps determine a realistic budget for your home purchase. Without it, you might aim for properties that could exceed your financial capacity in the long run.
What percentage of income is recommended for a mortgage?
When determining your borrowing capacity, the guidelines used by lenders ensure that your mortgage payments do not overwhelm your financial health. In doing so, lenders use two key ratios:
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Gross Debt Service (GSD): This ratio stipulates that you should not allocate more than 32% of your gross annual income toward all housing-related expenses.
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Total Debt Service (TDS): This ratio considers your total debt obligations, including your mortgage payments, credit card payments, car loans, and other debts. Generally, your total debt payments should not exceed 40% of your gross annual income.
Good to know: If you are applying for a mortgage as a couple, the lender will typically combine your joint incomes and debts to assess your borrowing capacity.
What is the 30% rule?
The 30% rule is a guideline that suggests limiting housing-related expenses to one third of your net monthly income whether you are a homeowner or a renter.
For instance, if a household earns $4,000 per month, it should allocate a maximum of $1,250 towards:
- All mortgage costs
- Electricity, internet, insurance, etc.
Good to know: Feel free to use our online mortgage calculator to estimate your potential monthly payment.
How much do you need to earn to buy a home?
For many households, purchasing a single-family home marks a significant life milestone. The feasibility of this goal depends on several factors:
- Purchase price of the home: This varies widely depending on the location. The price won’t be the same in Trois-Rivières or Montréal.
- Mortgage rates: Whether you opt for a variable or fixed-rate mortgage will impact your monthly payments.
- Mortgage term length: The duration of your mortgage term affects the amount you pay monthly and over the loan’s lifetime.
Consider a household earning $100,000 annually. While this income might make homeownership achievable, it's crucial to assess:
- All sources of income and expenses comprehensively.
- Ensuring mortgage payments does not exceed one third of your net income.
- Lifestyle choices and the specific property being considered, as these can influence affordability.
Furthermore, if the down payment is less than 20% of the home’s purchase price, CMHC mortgage loan insurance may be required. This insurance, typically around 4% of the mortgage amount, protects the lender in case of default and must be factored into the total cost calculations.
Lower the mortgage percentage to suit your budget
To bring down the percentage of your income allocated to the mortgage to one third of your net monthly income, there are several strategies you can consider.
Firstly, it might be beneficial to cut back on discretionary expenses. This could involve reducing dining out, travel, or other non-essential spending habits that impact your budget. Additionally, it’s wise to anticipate future expenses that may be temporary, such as car loans or childcare costs, and factor them into your financial planning.
If adjusting your budget feels restrictive, another approach is to focus on properties like condos or homes that need renovation. These options often come with lower purchase prices, making them more affordable. Regardless of your approach, it’s essential to choose a mortgage amount and term that align comfortably with your income.
Are you looking for a mortgage loan?
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