Canadian Mortgage Affordability ~ Income Required to Borrow
Mortgage Tips ~ Rent or Buy? ~ Earnings by Province
Legend to the Mortgage Affordability Table Below
- Column #1: If you Google "homes in Canada under $100,000", you will find quite a few. Remember to add closing costs, land transfer taxes and GST if they apply, otherwise you will have less down payment than you think. Check your local market area.
- Column #2: If you have to get a mortgage of greater than 80% of the sale price, then you pay considerably more for insurance premiums and risk fees. Your lender may require 25% down instead of only 20% to qualify for a "conventional mortgage". Check your local market area.
- Column #3: These are your monthly payments for a 5 year fixed rate mortgage amortized over 25 years, calculated semi-annual not in advance.
- Column #4: These are your possible monthly payments if you add your property taxes and insurance to your mortgage payment. I have used a 10% addition which may be too much or too little. Lenders will also want to include Strata Fees, Utilities and and additional Debt Payments to your total monthly payment calculation. Check your local market area.
- Column #5: This is your gross (pre-tax) monthly "household" income required before a lender will approve your mortgage using a Total Debt Service Ratio (TDSR) of 36%. CMHC states here that the Debt Service Ratio among lenders, ranges between 32% and 40% depending on what expenses are used in their formulae. CMHC has other useful mortgage information here.
Income required (col #5) to get Fixed Rate 5.14% Mortgage
for 5yrs, amortized over 25 years, calculated semi-annual not in advance
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Canadian Residential Mortgage Tips
Get pre-approved for the maximum mortgage you can. Start with your own bank and then get 2 other quotes. Compare not only interest rates but closing costs and any 3rd party fees. Mortgage market rates and fees can fluctuate daily; a good broker will spot the differences. The table above shows the income required to qualify for a mortgage this month.
Make sure your mortgage is portable. If you get transferred or decide to change neighborhoods, most banks allow you to move your mortgage to a new property without penalty.
Always make your loan and other debt payments on time. Every delinquent item in a credit record reduces your ability to get the best (cheapest) loans. Lenders care about only one thing... the repayment of debt on time.
If a loan payment has to be late, the hierarchy of loans to be late on are: credit cards, installment loans and mortgages. Always pay your mortgage first.
Your mortgage loan rate of interest is generally less than any other type of loan. If you have significant debt outside your mortgage, get your bank to increase the mortgage at your renewal date and pay off the higher interest rate loans.
Take advantage of any bank offering that will reduce your debt quickly. For example, given the choice between one payment per month (monthly) or half of the payment every other week (bi-weekly), choose the bi-weekly payments. You will end up making the equivalent of 13 full payments per year if you are paying bi-weekly as opposed to 12 with monthly repayments. But make sure you check that each bi-weekly payment will go towards reducing your principal and make sure there are no service fees. Note also that bi-weekly is not the same as bi-monthly. Bi-weekly results in 13 full payments per year. Bi-monthly results in only 12.
Most mortgages allow a percentage of the principal to be repaid in any calendar year beyond your regular payments. Find out what is allowed and either make the equivalent payments against the principal each month or as a lump sum once or twice per year. The faster you reduce the principal owing, the less interest you will pay.
At every term renewal take any available savings if not earmarked for something else, and use the savings to pay down your mortgage principal.
Always choose the shortest amortization rate that you can afford. If interest rates are lower on a renewal date than when you originally took out the loan, choose to reduce the amortization rate rather than the payment amount if you can afford it.
Reverse Mortgages are not a good choice for elderly homeowners wanting to extract equity from their property because reverse mortgages have much higher fees than conventional loans. A better solution is to get a conventional mortgage, or a line of credit or sell the property and downsize into a less expensive or rental property.
Commercial mortgages are generally more expensive (more risk) than residential. Do a thorough cash flow analysis of the income producing property before you commit to mortgage terms. Get my real estate Evaluator Spreadsheet and quickly assess the value of any property. The strategy of paying down a mortgage quickly may not be as advantageous in a commercial/revenue property setting as it is in a residential setting. In Canada, residential mortgage interest is not deductible against income.
RENT or BUY ?
The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's safe to buy for yourself because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:
Thanks to http://patrick.net/housing/crash.html