Know your financial strength before you look for house
Now you are mentally prepared. You have a stable income source. You have an amount for down payment. But you are not sure about the maximum amount you can invest to buy your dream home. We have a very handy Affordability Calculator to let you know about financial strength. Excited to check on the tool. Please hold […]
Now you are mentally prepared. You have a stable income source. You have an amount for down payment. But you are not sure about the maximum amount you can invest to buy your dream home. We have a very handy Affordability Calculator to let you know about financial strength.
Excited to check on the tool. Please hold it for few minutes more. We strong suggest to learn few things before you use the tool.
Down Payment:
This is the amount you have to pay upfront. The rule for minimum down payment has recently been changed. The minimum down payment for a house up to $500000 is 5% of price. If you want to purchase, anything more than $500000. Calculation is little different. The minimum down payment of first 500000 is 5% as previous. You have to give 10% of the remaining portion of the price as down payment. Let us give an example.
Minimum down payment for $500,000 house is $25,000 (5% of home price)
Minimum down payment for $600,000 house would be $35,000 (5% of the first $500000 + 10% of remaining $100,000)
Off course, you can get a mortgage with minimum down payment. But that will not be a conventional mortgage. You have to lend money from high-ratio mortgage, for which you have to pay a monthly insurance premium for your mortgage. However, you can avoid this extra premium if you give 20% or more as a down payment, which will qualify you for conventional mortgage.
Pay off or Amortization period
Amortization refers to the number of year you want to repay your loan. This is usually 25 years. The period can be shorter. In that case , you have to pay less interest and monthly installment would be higher.
Interest Rate
There are three types of interest rate: Fixed rate, variable rate and protected variable rate.
Fixed rate: Rate of the interest is fixed for a term. Whatever the market situation, your interest rate is fixed. Fixed Rate is little higher than others
Variable rate: Your interest would be fluctuated as per the market rate. This is more suitable, when you presume interest rate may drop.
Protected variable rate: This is similar to variable rate. However, maximum rate is determined beforehand, which means your interest rate can not be more than certain predetermined rate.
Choice of interest rate can be very critical. It needs a lot of speculation and knowledge to take the decision
What is the maximum money you can have from lender?
Two simple rules guide the whole process-
- Your total monthly housing cost (monthly mortgage payment for house + property tax + heating cost) should not be more than 32% of your gross monthly family income before taxes.
- Your total monthly loan payments (monthly housing loan payments + other monthly loan or credit card payments) should not be more than 40% of gross monthly family income before taxes.
Based on these two principles, bank determines two ration. Gross Debt Service (GDS) ratio and other one is Total Debt Service ratio.
GDS ratio is calculated simply dividing monthly total housing cost (monthly mortgage payment for house + property tax + heating cost) by monthly gross income of the family before taxes.
TDS ratio is calculated simply dividing total monthly entire debt load (monthly housing costs + other monthly loan or credit card payments) by gross monthly family income before taxes.
Example: (you do not need to the calculation, use our affordability calculator, you will get the result automatically)
Your monthly gross income = $5000
Your spouse’s gross income = $3000
Other sources of income (if any) = $2000
Your monthly gross family income= $10000
You are planning to buy a house of 500,000
You are paying $ 25000 as down payment
You need to borrow another $475000
At an imaginary interest rate of 3.39 and for 25 years of repayment period, your monthly mortgage payments would be approximately $ 2350 (can be calculated from our affordability calculator)
At present rate of City of Toronto, your yearly residential property tax would be 0.7056% of property price. Your monthly property tax would be $294.
Your heating cost would be approximately $150.
Your monthly housing cost would be $ (2350+294+150) or $ 2794
Your monthly payment of your personal loan = $100
Your monthly student loan payment =$100
Your monthly credit card payment =$100
Your monthly entire debt load = $ 2794 + $100 + $100 + $100 = $3094
So your GDS ratio would be 0.2794 and TDS ration would be 0.3094.
To be eligible for loan, your GDS and TDS ratio should be lower than 0.32 and 0.40 respectively. In this particular case, you may be eligible for the required loan.