Regardless of where you live in Canada, or the size or type of property you’re looking at, buying a home will often be the single largest purchase you ever make. Of course, if you’re like most people and take out a mortgage, it will likely also lead to the single largest loan you’ll ever have!
Although I can’t provide mortgage services or give advice about mortgage rates and which mortgage lender you should approach, I can provide individual life insurance to cover your mortgage debt. I can also look at your financial picture and help you to see how buying a home fits into your budget.
Lenders will put your finances to the test. They want to feel confident that you will be able to make your regular mortgage payments.
Can you make the monthly payments? Passing your lender’s financial tests
Before they give you a mortgage, most lenders want to get a sense of your ability to repay the money they lend to you.
To get a feel for whether your finances can withstand the extra burden of regular mortgage payments, lenders generally have two tests: the gross debt-service ratio test and the total debt-service ratio test.
Gross debt-service ratio test
For this test, lenders add up your estimated monthly mortgage payments and your property taxes. These are called your housing costs—essentially what you have to pay to keep a roof over your head. (Sometimes lenders will also include your heating costs.) In general, this number can be up to 32 per cent of your gross monthly household income.
An example? Say your family’s monthly income before taxes is $10,000. Up to 32 per cent, or $3,200, can go towards your housing expenses. If your anticipated property taxes are $300 a month, that leaves $2,900 as your maximum monthly mortgage payment.
Total debt-service ratio test
In addition to your housing costs, lenders also want to make sure you aren’t carrying too much debt overall. The more debt you have, the more likely it is you may run into trouble making your mortgage payments.
To assess whether your debt load will still allow you to comfortably pay them back, lenders use a second ratio. This is known as the total debt-service ratio.
In addition to your monthly housing expenses (your monthly mortgage payment and property taxes), they add the total payments you have to make on all your other debts, including credit card balances, car loans and home equity lines of credit. Together, these monthly payments can’t be greater than 40 per cent of your gross monthly income.
Decide what you can afford to spend
No matter how much a lender says you can borrow, do your own analysis. Just because the bank is willing to let you take out a certain-sized mortgage doesn’t mean you should.
While a lender may feel safe lending you a certain amount, it’s what makes sense for you and your family that’s important.
Before you decide to spend a certain amount for a property, it pays to:
• Consider how your day-to-day cash flow will be affected.
• Look at whether you’ll have to cut back in other areas, such as holidays or entertainment.
• Assess the impact on your savings and retirement strategy.
Your real estate agent will answer your questions about mortgages, mortgage rates, and mortgage lenders. Call me to learn more about the benefits of an individual life insurance policy to cover your mortgage debt.
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