How much Mortgage can you afford ?

robolf

Has anyone used any affordability calculators?. We are planning to buy a new condo in Toronto. I have a very good credit score and partner is also getting involved. I am not sure whether we can afford it or not. My friend suggested me this calculator by Canada Mortage Direct. http://www.canadamortgagedirect.com/tools-resources/calculators/mortgage-affordability-calculator/ . I checked with this tool and the payments are above our budget. what should we do? Should we give up the idea.

Xstatic3333

A calculator can't know your full financial situation. We used a spreadsheet to determine our payments before buying our home. We wanted money left over for travel, and hopefully daycare in the future, so we needed payments much lower than the calculators were giving us. This may go without saying, but don't forget, in addition to your DP, to have money saved for closing costs and an emergency fund. Also, take into account how much higher your utilities will be.

Erikan73

I'm with PP, it's best to work backwards figuring in all your monthly expenses from food, vehicles expenses (maintenance, gas, insurance), cell phone, medical expenses, haircuts, any memberships you may have, utilities (approx. for potential new home) and any other expenses that you currently plan for. Then make sure to put money aside for home repairs, because even if it's a move in ready house, at some point you'll need to repair/replace things or even just need to get things as you move in like curtains for privacy. Then see what you have left. Then talk to your bank and tell them based on a payment of x amount each month, what price range should I be looking at, and don't forget to include taxes and home owners insurance. Good luck!

hoffse

The problem with these calculators is that your spending tends to shift a lot once you own a house, and these calculators don't account for that.  I suppose that's not necessarily true for everybody, but suddenly all the things your landlord took care of is on you.  I guess the major exception here is if you bought new and happened to get lucky your first few years.

I can tell you that in terms of home maintenance we really needed to do our first year, we spent a few thousand bucks between plumbers when a couple pipes burst, two floods in our basement, a hot water heater that died, insulation for our attic, etc.  Our utilities tripled in price.  We had to buy things like a lawn mower and edger.

There was also a lot we wanted to do - new paint, decor, we have had some large remodels too.  All of that is discretionary of course, but be honest with yourself - if you buy a house with hot pink and hot teal walls like we did (prior owners had teenage girls), are you really going to leave it like that?  Or are you going to paint those rooms while they are empty and there is no furniture to move?

Speaking of furniture, will your furniture fit in your new place?  Will it be too small like ours was?  Or will you face an even bigger issue like one of my coworkers and have a sectional that literally does not fit assembled in any room of his new house?

Unfortunately, you won't know the answers to any of these questions until you find a house and are under contract.  It's hard to set a budget with so many variables, so the best thing to do is be conservative.  H and I took the amount those calculators said we could afford and cut it in half.  Realistically, we could have afforded more than we spent, but it would have limited our ability to remodel, decorate, continue to travel, etc.   Neither of us has ever regretted spending way less than our max budget.

Whatever you do, make sure you keep a cash reserve on hand after the dust settles from closing, especially if you choose an older house.  Personally, I would not be comfortable with less than $5,000 set aside for home emergencies (minimum), and I would prefer to have enough in reserve to replace a major system like the HVAC.  In my area those run $8-$10K.

hoffse

Also, I think @Xstatic is spot on to think about daycare costs if you don't have kids yet but hope/plan to have them.  H thought I was a little crazy for figuring that into our house budget when we were looking two years ago, but now we are thinking about TTC this fall.  He wanted to see a hypothetical baby budget recently, and once he saw how much daycare costs, he actually thanked me for figuring it in when we were buying our house.  

It seems like everybody on the internet and in real life says that you can "never afford to have kids."  I can honestly say that while kids kind of terrify us, it's not because of money.  We planned for those costs before committing ourselves to a mortgage.

If kids are not in your plan, then obviously there is no need to account for those costs.  But do think about costs for other things - health, aging parents, whatever.  Your expenses will not stay static, and you need to think about how they might change during the years you are in your new condo.

MommyLiberty5013

The general rule for determining how much house one can afford is to first consider what sort of cost of living area in which you live. High cost of living. Mid cost of living. Low cost of living.

Each cost of living area has a percentage of Gross (before tax income) assigned to it.

High = 30%

Mid = 28%

Low = 25%

The percentage indicates the MAXIMUM amount a family should spend on housing costs.

For example, if I live in a high cost of living area, and my DH and I gross $80,000 per year (before taxes), then annually we should spend NO MORE than $24,000 on housing costs annually, which amounts to $2,000 monthly.

That monthly amount includes the mortgage (principle and interest), home owners insurance, property taxes, and the utilities (water, sewer, trash, gas, and electric).

If we spend more than $2,000 per month on housing, we are over extended on our housing costs.

This is a pretty good general rule to follow as it helps insure you won't be mortgage poor and cash strapped every month.

MommyLiberty5013

I also want to add that the amount your mortgage lender says you can "afford" will likely be different and likely HIGHER than this amount you have come up with. But, you need to stick to your budget.

The mortgage lender only sees what's on your credit reports (credit files only such as car loans, student loans, credit cards, etc.) S/he has no idea about your other non-credit related expenses.

Therefore, it is up to your judgement (not theirs) to decide what you can afford. They will approve you for more, but that amount is not the same number as what you can afford.

For example, our mortgage lender in the past had approved us to buy a $600k house based on our credit files and scores. But, we could easily afford a $320k house. We knew we didn't want to be cash strapped and living solely to pay back a mortgage loan.

cbee817

hoffse said:

Also, I think @Xstatic is spot on to think about daycare costs if you don't have kids yet but hope/plan to have them.  H thought I was a little crazy for figuring that into our house budget when we were looking two years ago, but now we are thinking about TTC this fall.  He wanted to see a hypothetical baby budget recently, and once he saw how much daycare costs, he actually thanked me for figuring it in when we were buying our house.  

It seems like everybody on the internet and in real life says that you can "never afford to have kids."  I can honestly say that while kids kind of terrify us, it's not because of money.  We planned for those costs before committing ourselves to a mortgage.

If kids are not in your plan, then obviously there is no need to account for those costs.  But do think about costs for other things - health, aging parents, whatever.  Your expenses will not stay static, and you need to think about how they might change during the years you are in your new condo.

I speak from experience on this one- when we had 2 kids in day care full time (DD#1 is now in kindergarten so she only needs after school), we spent on average $1,700/month for day care. Our mortgage (including escrow) is about $1,300/month. So we could technically afford 2 houses in our current neighborhood once day care is over. Now that just DD#2 is in day care, it still averages about $925/month and that's with a 2 day/week schedule for July and August (DH is a teacher) and DD#1's after school is $168/month (also excludes July and August).

jtmh2012

MommyLiberty5013 said:

I also want to add that the amount your mortgage lender says you can "afford" will likely be different and likely HIGHER than this amount you have come up with. But, you need to stick to your budget.

I'll second this.  When we pre-qualified before looking for our last house, the mortgage and expected taxes would have left us with $1000/month out of my paycheck.  Um no.....

jtmh2012

Also don't forget to leave a buffer for things like a car payment.  Given 15-30 years for a mortgage, you will be buying a car.

julieanne912

That calculator says we can afford a mortgage of almost exactly what our original mortgage amount is ($390ish). 

But we are very house poor right now.  We bought a new build so we've been having to put in all the landscaping, a driveway (no, it was not included other than a short pad in front of the garage), things like window well covers, window treatments, etc.  Now with a condo you won't have some of these expenses, but you will have some.  In fact, these expenses surprised some people, we already had someone in our neighborhood sell their brand new house because they didn't think about what all of that would cost after moving in.  But, it being new, the maintenance costs won't be as much in the next 10 years or so than if we had bought an older house, and at least the things we are doing are adding value to the house.

Also keep in mind with a condo, the building itself could end up needing maintenance... things like a new roof etc.  They may do a special assessment to the owners to help pay for that.  Just something to keep in mind with a condo.  A lot of people buy one think that they won't ever be responsible for the building itself... but you are, either through the monthly fees or through specials to pay for bigger projects.  I rented a condo in an old historic building in Chicago.  The HOA fees (paid by owner in my case since I was renting) were almost $700/month.  But because of that, they never had to do specials to pay for projects, which were pricey because of the historic nature of the building.  

als1982

I'm always suspicious when a new poster starts out with a link, but I'll bite anyways. When I first bought, I was making $55,000 and qualified for more than $225,000 (crazy). I knew that was way too high and ended up buying a home at $169,000. Even then, the payments were manageable but tight and didn't allow me to save as much per month toward retirement as I would have liked. Now, I'm married and we make 4 times that amount, living in the same house. It feels awesome that such a small amount of our take home pay goes to housing expenses. It allows us to fully max out our retirement accounts and travel. I will never go back to being house poor again!

lbonga1

@MommyLiberty5013 Are you sure those percentages are based on gross income? I always thought they were based on net. If you're basing it on gross but have a lot of pre-tax deductions taken from you're paycheck (health/dental/vision insurance, HSA, FSA, 401k, etc) you could end up really cash-strapped trying to make your mortgage payment.

ThinkingCapital

I've personally found that most online calculators aren't accurate. You can put the same data into two different ones and get wildly different answers.

JoanE2012

That calculator says we could buy a house over a million dollars.  Yeah, no.  That's ridiculous.   Most important to us was that we could afford the payments on one income should one of us lose our jobs, so we kept that in mind when deciding what we could afford.  Even when I put one income in, it's says we could buy a house that was well over our comfort range.

Like PPs mentioned, you need to think about the future - saving for retirement, kids, maintenance, etc and factor that into what you can comfortably afford.  We love to travel, so we set aside a decent percentage of our salary just for that!  Please don't get sucked into calculators.

LillibetteV

For kicks I tried this calculator with my own numbers and I used net income - all I can say is OMG! Following this calculator would definitely leave me house poor. It basically works out so that all of my husband's salary would be for the mortgage if we did the 5% option. Granted I make more than him but not THAT much more. The 15% down option is slightly more reasonable, but still too high. Plus Canada doesn't even have 30 year fixed mortgages so what happens if that rates go up? 

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

jtmh2012

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

LillibetteV

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

jtmh2012

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

LillibetteV

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

My understanding is that if the house costs more then you take out another loan for the difference in Canada. You also have to refinance your loan every 5 years (they amortize it over a longer period, but then you have to regularly renegotiate) so I'm not sure if you can refinance them into one loan down the line? The whole idea baffles me - I like the security of knowing that my mortgage payment is never changing!

jtmh2012

LillibetteV said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

My understanding is that if the house costs more then you take out another loan for the difference in Canada. You also have to refinance your loan every 5 years (they amortize it over a longer period, but then you have to regularly renegotiate) so I'm not sure if you can refinance them into one loan down the line? The whole idea baffles me - I like the security of knowing that my mortgage payment is never changing!

Wow.  Glad I have my 15 yr mortgage......:)

Xstatic3333

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

My understanding is that if the house costs more then you take out another loan for the difference in Canada. You also have to refinance your loan every 5 years (they amortize it over a longer period, but then you have to regularly renegotiate) so I'm not sure if you can refinance them into one loan down the line? The whole idea baffles me - I like the security of knowing that my mortgage payment is never changing!

Wow.  Glad I have my 15 yr mortgage......:)

I wonder if this plays into the ridiculous mortgage situations I see on Property Brothers.

jtmh2012

Xstatic3333 said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

My understanding is that if the house costs more then you take out another loan for the difference in Canada. You also have to refinance your loan every 5 years (they amortize it over a longer period, but then you have to regularly renegotiate) so I'm not sure if you can refinance them into one loan down the line? The whole idea baffles me - I like the security of knowing that my mortgage payment is never changing!

Wow.  Glad I have my 15 yr mortgage......:)

I wonder if this plays into the ridiculous mortgage situations I see on Property Brothers.

Do tell?  I've seen the show, but we don't have cable, so don't get to watch it all the time.

julieanne912

Xstatic3333 said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

My understanding is that if the house costs more then you take out another loan for the difference in Canada. You also have to refinance your loan every 5 years (they amortize it over a longer period, but then you have to regularly renegotiate) so I'm not sure if you can refinance them into one loan down the line? The whole idea baffles me - I like the security of knowing that my mortgage payment is never changing!

Wow.  Glad I have my 15 yr mortgage......:)

I wonder if this plays into the ridiculous mortgage situations I see on Property Brothers.

I was wondering that too... how all these young couples/families can afford $700k+ mortgages AND pay for the renovations (which they do pay for, they just get the labor and I think the staging furniture covered by the show I believe).  

brij2006

julieanne912 said:

Xstatic3333 said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

My understanding is that if the house costs more then you take out another loan for the difference in Canada. You also have to refinance your loan every 5 years (they amortize it over a longer period, but then you have to regularly renegotiate) so I'm not sure if you can refinance them into one loan down the line? The whole idea baffles me - I like the security of knowing that my mortgage payment is never changing!

Wow.  Glad I have my 15 yr mortgage......:)

I wonder if this plays into the ridiculous mortgage situations I see on Property Brothers.

I was wondering that too... how all these young couples/families can afford $700k+ mortgages AND pay for the renovations (which they do pay for, they just get the labor and I think the staging furniture covered by the show I believe).  

I know when we bought our foreclosure, it appraised for much higher than we purchased it for.  So we were able to take an additional $10k out on the mortgage to fix it up.  It still kept us under 80% of the value mortgaged.  
So some mortgage companies do that with fixer uppers.

Xstatic3333

julieanne912 said:

Xstatic3333 said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

My understanding is that if the house costs more then you take out another loan for the difference in Canada. You also have to refinance your loan every 5 years (they amortize it over a longer period, but then you have to regularly renegotiate) so I'm not sure if you can refinance them into one loan down the line? The whole idea baffles me - I like the security of knowing that my mortgage payment is never changing!

Wow.  Glad I have my 15 yr mortgage......:)

I wonder if this plays into the ridiculous mortgage situations I see on Property Brothers.

I was wondering that too... how all these young couples/families can afford $700k+ mortgages AND pay for the renovations (which they do pay for, they just get the labor and I think the staging furniture covered by the show I believe).  

Yes, that's the pretty typical situation.  

"John and Brenda are ready to strike out on their own!  But with a down payment of only $10,000 and a total budget of $750,000, choices will be limited.  Can the Property Brothers find them the starter home of their dreams?"

My thinking is that if they have to refinance every 5 years anyway, they might get away with much smaller monthly payments than we do on a similar home in the states.  Is anyone here from Canada?  Bueller?  I'm quite curious about this.  

julieanne912

brij2006 said:

julieanne912 said:

Xstatic3333 said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

Side note: last time I was in Montreal visiting friends we got talking about mortgages and buying houses and the differences between the US and Canada were pretty shocking to all of us!

Aside from not having a 30yr fixed, what else is different?

My understanding is that the mortgage is tied to the borrower in Canada so you could transfer your mortgage to a new property if you decide to sell and move. In the US the mortgage is tied to the property so if I decide to sell my house and buy a new one I need to sell the house, use the proceeds to pay off the existing mortgage, and apply for a new mortgage for the next house. 

Interesting.  I'm assuming there's a method for dealing with the fact the two houses don't cost the same.

My understanding is that if the house costs more then you take out another loan for the difference in Canada. You also have to refinance your loan every 5 years (they amortize it over a longer period, but then you have to regularly renegotiate) so I'm not sure if you can refinance them into one loan down the line? The whole idea baffles me - I like the security of knowing that my mortgage payment is never changing!

Wow.  Glad I have my 15 yr mortgage......:)

I wonder if this plays into the ridiculous mortgage situations I see on Property Brothers.

I was wondering that too... how all these young couples/families can afford $700k+ mortgages AND pay for the renovations (which they do pay for, they just get the labor and I think the staging furniture covered by the show I believe).  

I know when we bought our foreclosure, it appraised for much higher than we purchased it for.  So we were able to take an additional $10k out on the mortgage to fix it up.  It still kept us under 80% of the value mortgaged.  
So some mortgage companies do that with fixer uppers.

Yeah but we're talking 50-100k in renovations on an already expensive house.  

And these days, they are way less lenient with mortgages for fixer uppers.  You have to have a specific loan type, it's very rare to just roll repairs into a regular mortgage now.  It's also a big pain and takes longer to close.  What people do now is close on the house, then do a line of credit to do repairs/upgrades.  Or like in our case, make a smaller down payment to save cash for the upgrades. 

short+sassy

julieanne912 said:

Yeah but we're talking 50-100k in renovations on an already expensive house.  

And these days, they are way less lenient with mortgages for fixer uppers.  You have to have a specific loan type, it's very rare to just roll repairs into a regular mortgage now.  It's also a big pain and takes longer to close.  What people do now is close on the house, then do a line of credit to do repairs/upgrades.  Or like in our case, make a smaller down payment to save cash for the upgrades. 

My mortgage guy gave me a sweet deal on the duplex I bought last year that needed renovations.  I was able to roll the repairs into the loan and was then given a line to access as I either turned in construction receipts or turned in a repair estimate.  However, it wasn't the hassle and high rates of a construction loan.

Because I bought it under my LLC, it was considered a commercial loan.  So perhaps that was the difference.