When you are ready to enter the housing market, you'll put a lot of thought into costs. But instead of focusing on what kind of mortgage you could secure from a lender, you may want to start with deciding what are sustainable monthly payments. It's sometimes true that you can get approval for a larger mortgage than you can actually afford, putting more strain than intended on your finances.
It starts with your take-home pay. Most experts say your housing or mortgage payments should be no more than 25-30 percent of your household net income. That takes into account not just your mortgage, but regular housing expenses and maintenance. As an example, thirty percent of $10,000 is $3,000 a month. If you are buying a home with a partner, the financial pinch likely stings less.
Lenders may also use the total debt service ratio, which pegs your total monthly debt payments against your household income. While lenders may want to keep this under 32 percent, including a new mortgage, you'll want to look closely at how much of your take-home pay is going towards debt before taking on a new financial commitment.
A mortgage is a long commitment. A lot can change over the life of your debt. If you have the maximum amortization term of 25 years, there's plenty of time to face challenges. Experts recommend having an emergency fund of three to six months to guard against job loss or illness. You may want to plan for even more, depending on whether you feel you can easily replace your lost income.
In addition to ensuring you have enough take-home pay to build up an emergency fund, you may also want to take additional steps to protect your investment. Life insurance or mortgage protection insurance may offer a safety net in case you can't meet your payments. These products can be a life saver, but they also come at an additional cost -- another thing you'll have to take into account.
The high costs of buying a home, which include closing costs, mean most people should intend to stay in their home for at least five years. But even if you plan to sell your home in the near future, it's important to think about other costs that may arise.
For example, if you don't already have children, you may plan to in the coming years. If you don't have much a buffer between your mortgage payment and your overall income, you could come up short. Your income just may not keep up with expenses.
But it's not all doom and gloom -- just a matter of taking a look at what you and your family want for the future, and how best to achieve it.
It's easy to get overwhelmed with mortgage figures -- but starting with the math can help make the picture a bit more clear. Rates.ca has a handy mortgage payment calculator that you can use to start to determine what you can afford. When you're ready, Rates.ca has up-to-date mortgage rates for you to compare lenders.