Determining What You Can Afford

June 1, 2019

Money: What Do You Have and What Can You Borrow?

Determining the type of home that you can afford to purchase involves figuring out how much money you have for your down payment and the mortgage loan that is available to you. The down payment is the largest cash cost involved with buying a home. How much cash can you come up with up-front? You’ll have to set aside a bit of that cash for the closing costs (land transfer tax, lawyer, etc.), and you’ll have to make sure that you can afford the ongoing home ownership costs in the future, but those are separate topics for another day.

Besides knowing how much cash you can produce, you will want to know how much a lender will loan to you. To do this, you will have to speak with a mortgage representative about a mortgage pre-approval, either through a lender directly (such as a bank or credit union), or through a mortgage broker, who will shop around for the best mortgage for you.

Besides knowing what a lender is willing to lend to you, another advantage of getting a mortgage pre-approval early in your home search process is that your mortgage agent can lock in the current mortgage interest rate for you for a certain period of time, in case the interest rate goes up while you are searching for your home.

Minimum Down Payment

In Canada, there are rules for the minimum down payment amount that is required on a mortgage loan. The down payment will need to be at least 5% of the purchase price of the property, up to a price of $500,000. (Note: if you are buying a property for any purpose other than for your own principal residence, then your lender will most likely require a higher down payment.)

If the purchase price of your home is more than $500,000, then your down payment will need to include 10% for the amount above $500,000. For example, if the purchase price of your home is $600,000, then your minimum down payment will be 5% on the first $500,000 ($25,000) plus 10% on the remaining $100,000 ($10,000), for a total of $35,000.

If the purchase price of your home is more than $1,000,000, then your down payment will need to include 20%  for the amount above $1,000,000. For example, if the purchase price of your home is $1,500,000, then your minimum down payment will be 5% on the first $500,000 ($25,000) plus 10% on the next $500,000 ($50,000), plus 20% on the remaining $500,000 ($100,000) for a total of $175,000.

Mortgage Loan Insurance

Note that if your total down payment is less than 20% of the purchase price, then you will likely be required to purchase mortgage loan insurance. Mortgage loan insurance protects the lender in the event that you do not pay your mortgage and the lender suffers financial loss due to your default. The insurance premium will be rolled into your regular mortgage payments, so there is no additional up-front cash cost for this premium.

Summary

When planning to buy a home, it is important to speak to a mortgage representative early in the process, to determine the amount of the down payment that will be required by the lender, and the maximum mortgage loan that the lender will be willing to lend to you. That way, you will have a good idea about the price range of homes to look at, and from there you will be able to predict what your closing costs and ongoing expenses will be.

If you would like a recommendation to a great mortgage representative, ask me and I will suggest a good fit for you.

Miia