What can you afford
Financing Options
Closing Costs
When you go to a financial institution to apply for a mortgage they will have two main areas of concern:
Two terms that will be used by financial people are GDS (Gross Debt Service Ratio) and TDS (Total Debt Service Ratio). These ratios are used by the financial institution to gauge both your ability to carry the mortgage and to make your payments consistently.
To determine if the property will have enough value to secure the mortgage, the financial lending institution will require an appraisal of the property. As long as the appraised value comes in at the purchase price or higher, there are no problems. However, if the appraisal comes in lower than the purchase price then you have to either:
OR
For most lenders the GDS must fall in the range of 28-30% of your Gross Family Income.
To calculate your Gross Family Income you can include:
For example if your gross family income is $50,000 annually, ($4166.66 per month) you could carry:
GDS x Gross Monthly Income = Maximum Allowable Principal, Interest & Taxes Monthly
30% x $4166.66 = $1250.00
Determine what the monthly taxes are on the property that you are interested in and subtract from the $1250.00. This will give you the maximum amount of principal and interest that you will be able to carry.
For our example, assume that the monthly taxes are $150.00. You would then be able to carry $1100.00 principal and interest.
By using the following amortization chart you can determine how much mortgage you can have:
$1100.00. 8.28 (from chart) = $132,850.24 (mortgage amount)
Calculating your Monthly PaymentFind the figure under the mortgage interest rate (%) that corresponds to the number of years you want to pay off the loan.
If your interest rate is 9% and the term of the mortgage is 25 years, then you need to pay $8.28 per month for each $1,000.00 of mortgage. Therefore, if your mortgage amount is $132,000.00 your monthly payment will be:
$8.28 X 132 = $1092.96
Calculating your Total Debt Service Ratio (TDS)Most institutions require that your TDS Ratio be 35 - 37% of your Gross Family Income.
To determine the Total Debt Service, add ALL of your monthly debt expenses; credit cards, car loans, child support, other mortgages, etc.
For our example lets assume monthly payments of $250.00
TDS x Gross Monthly Income = Maximum Allowable PIT & Debt (principal/interest/taxes)
37% x $4166.66 = $1541.66
Your allowable monthly expenses would be $1541.66, with PIT of $1250.00 and a debt of $250.00 per month. You would still be able to carry the $132,000.00 mortgage.
If your TDS is too high you may have to pay off some of your debt, consolidate debts to give you lower monthly payments.
City Profiles > Brandon Home > Financing > How Much Can You Afford? > Financing Options > Closing Costs
Here are five financial options worth consideration:
RRSP Home Buyers Plan
You can use up to $25,000 of your RRSP's to buy a home. If you are purchasing a home as a couple, this can mean up to $50,000. The amount is paid back over a 15 year period, and your first repayment is due within 2 years of withdrawal of funds. The plan has been highly successful and has been used by many Canadians. The plan has been extended into the current year, however certain conditions apply. For instance, RRSPs locked into company pension plans may not be applicable. Call your RRSP Centre if you have any questions about your own particular situation.
5% Down Payment
Canada Mortgage and Housing Corporation (CMHC) insures mortgages with 5% down for buyers. This plan is intended for Canadians who wish to purchase a home, and have the financial ability to both manage and sustain a large mortgage debt. The borrower(s) must qualify by having a GDS (Gross Debt Servicing) of no more than 35% and a TDS (Total Debt Servicing) of no more than 42%. The CMHC insurance premium is 3.75% of the mortgage amount.
* In the case of those who have suffered financial hardships these ratios may be lower (GDS - 32% and TDS - 40%).
Get Someone to Help Pay Your Mortgage
Have you ever thought of buying a property with an in-law suite, and renting it out to help pay the mortgage? Now that basement apartments are legal, as long as they conform to the Building Code and Fire Code, why not consciously buy your home with a built-in possibility of income to help pay off the mortgage sooner? This way you will be able to move more rapidly into your second home with more equity in your pocket. An apartment might bring in anywhere from $500 to $800 or more a month. That's quite a help when you're first starting out. Imagine someone giving you an extra $8,400 a year towards your mortgage payments? That pays 50% of your monthly mortgage cost of $1,400. It's worth considering.
Vendor Take Back Mortgage (VTB)
Some vendor's may be prepared to take back a mortgage to assist the buyer. The interest rate is usually lower than current market rates. The vendor may either hold the mortgage or sell it at a discount to a mortgage lender.
Prepaying a Portion of Interest or Pay downs
Back when interest rates were quite high and buyers could not afford to qualify for the high interest rates on the mortgages, the sellers sometimes were prepared to pre-pay a portion of the interest rate on a mortgage arranged by the purchaser or blend and increase an existing mortgage that carried an unattractive rate. This brings about a lower effective rate of interest and lower monthly payments.
Also, take a look at the different types of Government Programs & Financial Assistance. There are many incentives, grants, & rebates offered to help you own your home quicker than you think.
City Profiles > Brandon Home > Financing > How Much Can You Afford? > Financing Options > Closing Costs
A quick approach to closing costs would be to set aside 2 - 3% of your purchase price. Closing costs vary according to circumstances of each individual sale. They include:
Here is a closing costs estimator chart you can use to calculate the cash you will require when the time comes. Overestimate rather than underestimate. Make sure you have enough.