Plan ahead with Sue Wyseman

How much “house” can you afford these days?

It is everyone’s dream to own their own home; however, in a recent Industry Canada report, the average Canadian house price has increased 13% this past year, while salaries have only increased about 2.5%. With prices soaring and interest rates on the way up, how much “house” can you afford to buy these days?

Start with your mortgage pre-approval, to give you some idea of what size of mortgage you can actually afford on your income. Financial institutions use two standard formulas to calculate affordability – gross debt service ratio and total debt service ratio. Gross debt service ratio is calculated by adding the mortgage payment, monthly property taxes and monthly estimated heating cost - the total of this should not exceed 32% of your gross monthly income. The second formula is the total of the above expenses plus any other monthly expenses, including credit card payments and loan payments. The combination of these costs are not to exceed 40% of your gross monthly income.

Once you have your pre-approval, you will need to consider how much money you will have to use as a down payment. Most financial institutions will accept as little as 5% of the purchase price as a down payment, but down payments that are between 5% and 25% will require you to purchase insurance on the mortgage amount.

When saving for the down payment, money from savings outside your RRSPs is still your best option, as it is readily available to be used for the down payment and any unexpected costs you may incur closer to the closing date. However, if you have the money available in your RRSPs you can withdrawal up to $20,000, as long as the funds have been in the RRSP 89 days prior to withdrawal.

With your pre-approval and down payment firmly in place you can now confidently negotiate the best possible price on your dream home.