If you’ve begun considering buying a home and aren’t sure what you’re able to afford and what your mortgage payments will be, you can try out a couple of calculators: A mortgage affordability calculator and a mortgage payment calculator.
This is a guest post by RateHub.
How much can you afford?
The first step is figuring out how much you can afford, which is based on your household income, the costs of owning a home (such as property taxes and heating costs), and your regular monthly expenses (including loan and credit card debt payments).
You also need to figure out if you have enough saved for a down payment and the closing costs. The amount you’ll need to come up with depends on the type of property (house or condo) you purchase and where it’s located.
Your lender will look at two affordability ratios when determining how large your mortgage will be.
The first one is called the gross debt service (GDS) ratio. Under this rule, your monthly housing costs—principal and interest, taxes, and heating (PITH)—should be less than 32% of your pre-tax monthly household income. If you’re buying a condo, PITH includes half of your monthly condo fees.
The second ratio is called the total debt service (TDS) ratio. Under this rule, your total monthly debt costs should be less than 40% of your pre-tax monthly household income. On top of your monthly housing costs, this also includes auto loan or lease payments, credit card debt payments, and other loan expenses.
If you find these too difficult to calculate, a mortgage affordability calculator can do the work for you.
You’ll need to put down a down payment of at least 5% on a home. If it costs more than $500,000 and less than $1 million, you’ll need to put 5% down on the first $500,000 and 10% on the remaining amount. And if you have a down payment of less than 20%, you’ll also have to qualify for a mortgage at the Bank of Canada’s posted rate (currently 4.64%). Also, if the home costs more than $1 million, you’ll have to make a down payment of at least 20%.
And you’ll also need to pay closing costs, which aren’t included in your mortgage. These costs include title insurance, legal fees, and land transfer taxes (you can use a land transfer tax calculator to determine what you’ll owe). Expect these total costs to be anywhere between 1.5% and 4% of the property’s purchase price.
Once you know how much you can afford, you can determine what your regular payments will be by using a mortgage calculator. Enter the purchase price of your property, the amount of your down payment, the amortization period, the mortgage payment, and the mortgage type (fixed or variable).
Many calculators will let you choose different kinds of payment scenarios. A calculator will show you how you can pay off your mortgage faster if you choose a shorter amortization period (20 years instead of 25 years) or make accelerated bi-weekly payments.
And some calculators will allow you to include other regular monthly costs, like your phone, internet, and property tax bills. That will provide you with a better picture of your future monthly costs.
The bottom line
Mortgage affordability and payment calculators are an easy way to determine the amount you’ll be able to spend and what your expenses will be. Having this information will make you a better informed home buyer.