| Are you Financially Ready
to Buy an Ottawa Home?
So, you've decided that homeownership is right for you. Now
you need to determine if you are financially ready to buy
a house. In this Step, you will find a number of simple calculations
that you can do to evaluate your current financial situation,
how much house you can afford and the maximum home price that
you should be considering.
Once you understand these variables, you can make the best
choice for you and even save money.
Test Yourself
To avoid any future surprises, you can do some financial
exercises to see where you stand. They include: calculating
your net worth, your current monthly expenses and your current
monthly debt payments.
Knowing your net worth is important because you will need
this information when you discuss a mortgage with your lender.
Your net worth is the amount left over once you've subtracted
your total liabilities from your total assets. It will also
give you a snapshot of your current financial situation and
show you how much you can afford to put as a down payment.
How Much Can You Afford?
Now that you have a clear picture of your current financial
situation, it's time to find out what you can afford in monthly
housing costs. Lenders follow two simple affordability rules
to determine how much you can pay.
The first affordability rule is
that your monthly housing costs shouldn't be more than 32%
of your gross household monthly income. Housing costs include
monthly mortgage principal and interest, taxes and heating
expenses — known as P.I.T.H. for short. If applicable,
this sum also includes half of monthly condominium fees and
the entire annual site lease (in the case of leasehold tenure).
Lenders add up these housing costs to determine what percentage
they are of your gross monthly income. This figure is known
as your Gross Debt Service (GDS) ratio. Remember, it must
be 32% or less.
The second affordability rule is
that your entire monthly debt load shouldn't be more than
40% of your gross monthly income. This includes housing costs
and other debts, such as car loans and credit card payments.
Lenders add up these debts to determine what percentage they
are of your gross household monthly income. This figure is
your Total Debt Service (TDS) ratio.
Your Maximum Home Price
The maximum home price that you can afford depends on a number
of factors but the most important are your gross household
income, your down payment and the mortgage interest rate.
This table gives you an idea of the maximum home price you
can afford.
Income, Home Price and Down Payment Guide
| Household
Income |
5% Down
Payment |
Maximum
Home Price |
10%
Down Payment |
Maximum
Home Price |
25%
Down Payment |
Maximum
Home Price |
| $25,000 |
$3,000 |
$60,000 |
$6,300 |
$63,000 |
$18,900 |
$75,600 |
| $30,000 |
$3,900 |
$78,000 |
$8,200 |
$82,000 |
$24,700 |
$98,800 |
| $35,000 |
$4,800 |
$96,000 |
$10,100 |
$101,000 |
$30,300 |
$121,200 |
| $40,000 |
$5,700 |
$114,000 |
$12,000 |
$120,000 |
$36,000 |
$144,000 |
| $45,000 |
$6,600 |
$132,000 |
$13,900 |
$139,000 |
$41,700 |
$166,800 |
| $50,000 |
$7,500 |
$150,000 |
$15,800 |
$158,000 |
$47,400 |
$189,600 |
| $60,000 |
$9,300 |
$186,000 |
$19,600 |
$196,000 |
$58,800 |
$235,200 |
| $70,000 |
$11,050 |
$221,000 |
$23,400 |
$234,000 |
$70,100 |
$280,400 |
| $80,000 |
$12,500 |
$250,000 |
$27,200 |
$272,000 |
$81,500 |
$326,000 |
| $90,000 |
$14,400 |
$288,000 |
$31,000 |
$310,000 |
$92,800 |
$371,200 |
| $100,000 |
$16,275 |
$325,500 |
$34,800 |
$348,000 |
$104,300 |
$417,200 |
| Figures are rounded to the nearest $100. |
This table assumes a mortgage interest rate of 8%, average
tax and heating costs in Canada, and the mortgage an average
Canadian would qualify for based on a 32% debt service ratio.
For most people the hardest part of buying a home —
especially the first one — is saving the necessary down
payment. Many people will not have the traditional 25% of
the purchase price to put down. With mortgage loan insurance,
you can put as little as 5% down. Mortgage loan insurance
protects the lender and, by law, most Canadian lending institutions
require it. The way it works is if the borrower defaults (fails
to pay) on the mortgage, the lender is paid back by the insurer.
The cost for this type of insurance is in the form of a premium
and can be paid in a single lump sum or it can be added to
your mortgage and included in your monthly payments.
CMHC is a major provider of this type of insurance in Canada
and its current loan premiums are as follows:
| Financing Required |
Premium
% of Loan Amount |
| Up to and including 65% |
0.50 |
| Up to and including 75% |
0.65 |
| Up to and including 80% |
1.00 |
| Up to and including 85% |
1.75 |
| Up to and including 90% |
2.00 |
Between 90.01 and 95%
Traditional
Down Payment 2.75
Flex
Down |
2.75
2.90 |
Secured Line of Credit Surcharge
Non-amortized
repayment option:
5
years
10 years |
0.25
3.40 |
| *Premiums in Ontario and Quebec are subject
to provincial sales tax — the sales tax cannot be added
to the loan amount. |
Ottawa Home Buyers Guide
Ottawa Living is Ottawa's premier online
resource for everything about your home. We provide comprehensive
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