How much mortgage can I afford? (and calculating income and debt impacts)

– In this video you’ll
learn how much mortgage you can afford and how it’s calculated. That’s starting right now. – [Announcer] Welcome
to Homebuyer’s School brought to you by Brookfield Residential. – Hi everyone, I’m Karl. Welcome to another
Homebuyer’s School video, a channel where you get
the latest strategies, tactics and tips from home buying experts. And remember if this is your
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bell so you don’t miss anything. So today I’m joined by Mujtaba Syed, mortgage specialist for
the Bank of Montreal and the question we’re gonna answer today is how much mortgage
can I actually afford? How would you know that? Do you use the calculators online? How would you start and I guess how do the banks actually calculate that? – First find out what
you’re comfortable with at the monthly budget before you even look at calculators or anything like that. Cause calculators we just
look at numbers, right, we don’t look at certain lifestyles, we don’t look at stuff that we don’t consider to be mandatory payments. So first and foremost
set a budget for yourself that you’re comfortable with every month no matter what happens so you can pay. Say you fall sick or you get an injury, you want to travel, you want to make sure that you can pay that
mortgage no matter what. That’s the first step. The second step is going
through a pre-approval process. So most banks if your credit score is the optimal credit score,
which is 680 or higher, we will look at 44% of your
annual household income for all your debts. That includes the mortgage
payment, property taxes, utilities, any condo
fees that might be there, any other debts that are mandatory debts. And the reason why the bank do that they want the other 56% available to you just in case there’s some
unforeseen circumstances you do have a little bit of a life, something that we don’t consider
to be called mortgage poor, you have some savings,
so a lender in Canada will not go over 44%. Some lenders might make a discretion on a case by case
scenario, but it won’t be an insured mortgage with CMHC. It will be a conventional mortgage and every lender has their own
discretion that they’ll do. Now sometimes people will come back to me and say, “Listen, my total
debt ratio is only 40% “and I’m still not getting approved,” because there’s also a gross debt ratio that we take a look at. You might have zero debts, but this house it’s now gone over a threshold. So only your housing cost,
which is your mortgage payment, property taxes, utilities, condo fees, they can’t be more than 39% of your income if you have the optimal credit score. Now if you go up to 40%
once again hard stop. CMHC will not take a look at it even if it’s 39.01, right. It’s 39%, that is a hard stop
for just gross household debt. Total debt 44%, you don’t want to go over if you have a normal credit score. – So you only have actually 5% extra of the 39% of total debt. So if you have like a car
loan and credit card loans and if you’re kind of maxed out you’re kind of out of luck then, right? – You’re kind of out of
luck, but not necessarily. You can find a co-signer,
you can find other options or maybe you decide this house
is too expensive for you. Maybe you find something
that’s a little bit closer to your budget. You might want to reduce
the purchase price by a certain 50, 60,000, maybe 10, 20,000 depending until you get
those ratios in line so you can comfortably afford it. Those ratios are in line to protect you and the bank, but mostly you so you can afford those payments. Those 56% is available to us
God forbid anything happens. That breathing room is
very, very important. So it might not get you
into the perfect home, but it’ll get you into a home
that you’re comfortable with. It’s very difficult for a lot of people to get into the dream home
right from the get go, but maybe take it as a
step by step approach, get into something you can
afford, it’s comfortable for you, do it for a couple of years,
reassess your situation and then look from there and see what you want to do after that. – We actually have a great video where we talk about
everything in terms of TDS, gross debt ratio, everything
in terms of credit score. We’re going to leave that video up here and in the description
below for you to watch. So how did they come up with that 44%? Why isn’t it 45%, why isn’t it 50%? Like what led to that percentage? – It’s hard to say, but
I think the bank account just thought that 44% is the ideal number where it’s not too risky,
gives you the ideal purchasing power without
going slightly overboard and keep in mind this is
across the board, right, it’s not just based on
one specific person. So it’s a safe number to use for everybody and needs to kind of
follow the same guidelines and then that is the reason why and I think it is because the
last thing they want you to do is go into a house that you can’t afford and unfortunately now you are
struggling to make payments, you are struggling to make ends meet. You might be making the mortgage payment, but now you’re having
issues with your car payment or you’re having issues
with your grocery bills. Like those are things we don’t want. We want you to be comfortable
in every aspect of your life and getting the perfect home
right within those ratios is a big part of it because
your biggest expense is going to be your living expense which is your mortgage expenses. It’s one of the biggest expenses
that you have in your life and that has to kind of
fit with your lifestyle and your income. – In the terms of when you talk about 39% total home debt, right, like home payment. – Gross debt. – Gross debt, that 5% does that mean let’s say you have a
car that’s worth 20,000 is that included or just
the monthly payments? – We do look at it to see
what kind of debts you have, but more important than that is see what the monthly payments going out with your monthly income coming in. So your monthly payment per month will impact your ratios
more than what the balance of the debt is at that time. – How much does your income actually play into the calculations of how much mortgage you can afford? – 100%, your income is
a major deciding factor in your monthly obligations, right, because you have a certain level of income that comes up every month and from that a certain goes towards your debts. So we take a look to see how much is left after those debts are paid to see how much you can afford. So your income is a
very, very strong factor, one of the very important
parts of the five Cs of credit, which is capacity is
to look at the income. – Got it. And do you have anything else to add in terms of how much
mortgage you can afford? – Take a look, right,
assess your situation. You can explain to the lender,
“Listen this might seem “like it’s too expensive for me. “It’s right on my ratios, “but hey listen I just graduated. “I’m a professional. “My income potential is
gonna rise over the years “so it’s gonna be a lot more comfortable. “I’m expecting a big raise pretty soon,” that maybe the lender doesn’t know about. All of that stuff can play a big factor into helping you get
approved for that loan if you’re close to your limits. And if you’re already close to your limits maybe stay a little bit
under those limits, right. You do want to be comfortable
with your monthly budget. You don’t want to overextend
yourself or overpay. You always want to be comfortable and you want to be able
to live your life, right. That’s a very, very important part. – And I think probably
what you want to know is what are some programs to help you with your mortgage payments
and I’m gonna leave a video up here and in the description below talking about all those payments, especially for first time home
buyers who want that help, right, in terms of getting
a mortgage approval. So if you want to know
more about the mortgage approval process we’ve got
a great video series here on understanding the steps
required for mortgage approval as well as a great video series here on understanding mortgage rates. And don’t forget to
subscribe to keep learning from the experts and I’ll
see you in our next video.

4 thoughts on “How much mortgage can I afford? (and calculating income and debt impacts)

  1. What were some of your challenges when looking at your mortgage affordability? Any advice to those checking out how much mortgage they could get?

  2. Very informative video, as someone looking to first time buy my problem is not about the initial deposit but more my salary not being enough for the bank to cover me

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