Deciding on the exact amount of the mortgage loan is a delicate matter since you don’t want to get stuck with a mountain of debt and too large a house you can’t afford to maintain.
Let’s face it – real estate market in Canada features strong demand, and the prices continue to go up as we speak. Buying a new home demands quite deep pockets or at least a sizable loan that can be paid back over a long period. That brings us to the central question – how much debt can you assume when buying your first home without going in over your head and defaulting?
There are two ways to understand the question – what is legally allowed and what is considered to be good practice. Let’s try to answer both of those in a clear and unambiguous way.
Don’t overburden your monthly revenues
As a general rule, monthly installments on your loan should never exceed 30% of your current income, or you might end up with a cash shortage that forces you to borrow more. In fact, lenders won’t approve too ambitious applications for first-time mortgages from clients with small regular revenues. Since the country recently adopted stricter regulations, there are now precise limits based on annual income, so a family earning $100.000 a year can’t pay more than $2.750 per month or finance a home that costs more than approximately half a million. At any rate, it is recommended to stay under those limits and keep the percentage of your present income that goes on debt servicing at a reasonable level.
Be conservative with income estimates
Your boss mentioning a possible raise doesn’t count as reliable information when it comes to long-term financial planning. You can include only sources of income that are highly unlikely to change in the foreseeable future when you are calculating the amount of your mortgage loan. Rosy estimates of future earnings can land you in terrible trouble, so it is much better to err on the side of caution in this case. You can always opt for a bigger loan and replace your first home with a more luxurious one once your financial power grows and stabilizes. In fact, interest rates might change in a few years, and it could be to your benefit to upgrade the loan agreement at that time.
Length of the loan matters, too
The amount that comes due every month depends not only on the total value of the loan but also on the length of the amortization period. Standard mortgage loans in Canada are repaid in twenty five years, but it is possible to negotiate any length that fits your financial plan. It is a fine balance between paying off your debt as soon as possible and keeping your monthly obligations manageable – and the right answer depends on your financial situation. Most first time buyers in Guelph would be wise to play it safe and accept long amortization periods, but there are exceptions to every rule.