Can You Afford Your Own Home?

Q. I’ve been renting a small apartment for years, but now want to consider purchasing a condominium. I don’t know exactly how much I can afford, but I understand there is a formula to figure it out, is this true? – Carol L.

You’re correct! There is a formula that most lenders use to determine how much of a mortgage you will qualify for. Lenders generally approve you for a mortgage if the percentage of your gross annual income required to cover housing payments (mortgage principal and interest payments, property taxes, heating costs and 50% of condo fees) does not exceed 32% of gross annual income. This figure is called the Gross Debt Service Ratio. As personal lifestyle choices affect your monthly cash flow, it’s important to consider your fixed and discretionary monthly expenses when deciding how much mortgage debt you can afford to assume. The Mortgage Quick Qualifier tool at www.scotiabank.com will give you a good idea how much of a mortgage you will qualify for. Depending on your rent situation, a few dollars more per month may just allow you to become a homeowner!

Q. What is a reasonable amount for a down payment on a home purchase? We want to avoid paying for mortgage insurance, but we don’t want to stretch ourselves too much either? – Debra and John F.

A. These days there is more flexibility in borrowing options as financial institutions are lowering the amounts required for a down payment and, in some situations, providing qualified home buyers with the minimum down payment required. . The traditional down payment of 25% of the purchase price of the property qualifies you for a conventional mortgage and, in this case, mortgage insurance is not required. If the value of the mortgage exceeds 75% of the appraised value of the property, this would be considered a high-ratio mortgage and must be insured by either Canada Mortgage and Housing Corp. or a private insurer at an additional cost. If you haven’t yet saved the minimum down payment for a conventional mortgage but your cash flow is strong and secure, you can get into the home you want now by taking a high ratio mortgage to take advantage of prevailing low interest rates.

Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto.

Always consult a financial advisor before making decisions based on the advice above. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.