Buying - Step 3

Calculate Your Costs

Here are some basic calculations you can do that will help you determine exactly how much house you can afford.

Buying a home involves many financial considerations. Some home buying expenses are one-time costs and others are ongoing commitments.

Home Buying Costs

The Down Payment

If you have a down payment of 25% or more, you may qualify for a conventional mortgage loan which does not require mortgage loan insurance.

A minimum down payment of 5% is required for a high-ratio mortgage. These types of mortgage loans — for any amount in excess of 75% of the value of the home — are required to be insured against default

The federal government and some provinces offer incentive programs for homebuyers. You should consult an investment or tax advisor regarding the value of these plans for your particular circumstances.

The Mortgage

A mortgage is security for a loan on the property you own. It is repaid in regular mortgage payments which are blended payments. This means that the payment includes the principal (amount borrowed) plus the interest (the charge for borrowing money). The payment may also include a portion of the property taxes. See current mortgage interest rates.

Possible Extra Costs After You Move In

Maintenance Costs

You may want to start a separate maintenance fund — particularly if you’re buying an older home — by setting aside $500 – $1,000 and adding to it regularly. This reserve can be used to cover the costs of anticipated or unexpected repairs or replacement of such things as the roof or appliances.

Renovation Costs

You may find a “fixer-upper” — an inexpensive home in need of repair. One general rule is that renovation always takes longer than, and costs more than, you think

How Much Can You Afford?

The shortest and best answer to that question is: it depends — on a number of factors. The most important are your gross household income, your down payment and the mortgage interest rate. Lenders also consider your assets and liabilities. Your own lifestyle and debt comfort zone also come into play.

If you understand these variables, you can examine all your options. You can make the best choice for you and even save money.

To help you estimate the maximum mortgage you can afford, CMHC has developed an easy to use mortgage calculator.

Lenders follow these two simple rules to determine how much you can afford in monthly housing costs:

The first affordability rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses… known as P.I.T.H. for short. If applicable, this sum also includes half of monthly condominium fees and all of the annual site lease in the case of leasehold tenure.

Lenders add up these housing costs to determine what percentage they are of your gross monthly income. This figure is your Gross Debt Service (GDS) ratio.

The second affordability rule is that your entire monthly debt load shouldn’t be more than 40% of your gross monthly income. This includes housing costs and other debts such as car loans and credit card payments. Lenders add up these debts to determine what percentage they are of your gross monthly income. This figure is your Total Debt Service (TDS) ratio. Based on these ratios, lenders will advise you of the maximum home price they think you can afford.

Keep in mind that most homebuyers today keep their debt ratios comfortably below the maximums prescribed above. The lower your debt load, the more affordable your home and lifestyle will be.

This table gives you an idea of the maximum home price you can afford. These estimates take into account household income and the percentage down payment you have. They assume a mortgage interest rate of 8%, average tax and heating costs in Canada, and the mortgage an average Canadian would qualify for based on a 32% debt service ratio. Please note that for loans greater than 90% of the value of the home, a maximum house price of up to $250,000 may apply, based upon the price levels in your community. Contact your lender for the maximum price in your area.

Other Costs to be Aware of When You Buy

This is a list of possible extra costs involved in buying a home. Some of them are one-time costs and others, such as condominium maintenance fees and property insurance, will be ongoing monthly expenses. The good news is that not all of these costs may apply in your circumstances.

Don’t forget the tax: The 7% GST applies to new housing. However, there is a rebate, to a maximum of 2.5%, if your home costs less than $450,000. There is no GST on resale housing unless the home has been substantially renovated, and then the tax is applied as if it were a new home. In some provinces, the GST has been replaced by a Harmonized Federal and Provincial Sales Tax known as the HST. Also in other provinces, provincial taxes may be applicable.

Appraisal fee: If your loan is not insured, your lender may require a property appraisal at your expense. A basic appraisal for mortgage purposes will probably cost between $150–$250. Actual cost should be confirmed as it may vary with the location and complexity

Property taxes: Taxes are always a certainty. If you have a high-ratio mortgage, your lender may require that you have your property tax installments added to your mortgage payments.

Survey fee: Your lender will require an up-to-date survey. Ask the vendor to provide one as a condition of your Offer to Purchase, or you will have to pay to have one done.

Property insurance: This insurance covers the replacement value of the structure of your home and its contents. Your lender will insist on this because your home is the security for your mortgage.

Prepaid taxes or utility bills: You will have to reimburse the vendor on a prorated basis if some bills have been prepaid beyond the closing date.

Land transfer tax: This applies in most provinces. It varies as a percentage of the property’s purchase price. It is usually about 1% – 4%.

Service charges: You’ll be charged a fee to hook up new services and utilities, such as your telephone, at your new home.

Lawyer (notary) fees: Even a straightforward home purchase requires a lawyer to review the Offer to Purchase, search the title, draw up mortgage documents and tend to the closing details. Lawyers fees for a mortgage range widely depending on the complexity of the deal but will probably be at least $500.

Mortgage loan insurance premium and application fee: If you have a high-ratio mortgage, your lender will require mortgage loan insurance provided by CMHC or a private company. The insurance will cost between 0.5% and 3.75% of the amount of the total mortgage (additional charges may apply) and can be included in the mortgage. The application fee will range from $75 to $235 depending upon how the lender processes your application.(consult your local lender for further details)

Mortgage broker’s fee: A broker may charge a fee to find you a lender.

Moving costs: Don’t forget the cost of a professional moving company or a rental truck if you move yourself. Fees for a professional mover can range from $50 – $100 an hour for a van and three movers. These costs may be 10% – 20% higher at the end of the month and in the summer.

Estoppel certificate: A certificate that outlines a condominium corporation’s financial and legal state. The certificate and supporting documents will cost you up to $50

Condominium fees: Condominiums charge monthly fees for common-area maintenance, such as grounds keeping and carpet cleaning. Fees range widely depending on the type of structure but will probably be at least a few hundred dollars per month.

Home inspection fee: Inspectors are unregulated in many provinces, so fees range widely, from about $150 – $350 for a home priced under $300,000. Larger, more expensive homes cost more to inspect. A two-hour inspection carried out by an engineer who provides a written report will cost closer to the upper limit. Municipalities can also supply any available inspection reports on the property for a fee.

Renovation and repairs: A home inspection may indicate that the home needs major structural repairs such as a new roof. Don’t forget to factor these costs into the price of the home.

Water quantity and quality certification: If you’re buying a home with well service, you’ll have to pay a fee from $50-$100 to certify the quantity and quality of the water.

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