Before setting out on the journey to find and secure your perfect home, there are a few things we encourage you address.
Firstly, create a list of housing wants, wishes and needs, including location, size, condition and features.
Secondly - and more pragmatically - you must definitively answer the question: "How much home can I afford?"
As the answer to this question is not always simple, the urbaneer team weighed in with our finance friend Jake Abramowicz (aka. Mortgage Jake) for his insights.
Here's what Mortgage Jake had to say:
I have been helping people with mortgage lending for over 11 years now, and with the ever-changing landscape of borrowing, I offer some fundamental rules of thumb to Buyers when they're beginning their search for property. Here are my top recommendations for those seeking a mortgage pre-approval:
1. For every dollar of income you make, you can borrow approximately 5.5 times your gross income as a mortgage. The reason this sum is 'approximately' is dependent on on your existing debt load and the type of debts you carry. Generally speaking, though, right now the financing ratios are 1:5.5 for housing debt.
2. Multi-unit properties are more difficult to finance, especially if they are non-legal non-retrofit dwellings. Even though a property may have greater appeal because of its income component, it may not pass the approvals process with lenders. As a result, you may not be able to use the rental income to help qualify your borrowing debt. Be cautious and prudent.
3. The minimum down payment remains 5 percent of the purchase price for fully qualified clients and 10 percent if you're self-employed*. By fully qualified I mean: working full-time, showing good income and being a T4 salaried employee. This also includes being able to demonstrate a good savings history, proactive debt repayment and a favourbale credit score history. Crème-de-la-crème is key.
4. Pre-approvals are not worth the paper they are written on. The best deals always come when you have a "real live" Agreement Of Purchase And Sale in your hand. While it's critically important to get pre-approved in today's hot housing market, it should only be used as a guide for affordability, but not exclusively for the interest rate. Many buyers can get a better rate once they've secured a dwelling.
5. Speaking of affordability, the current "ratio" of housing expense to gross income is 35% with some exceptions. As a rule, no more than 35 percent of your gross income can be allocated towards your housing costs - including taxes, maintenance, and mortgage principal and interest payment.
6. A down payment of 20 percent is the minimum sum required to avoid having to pay mortgage insurance AND to extend your mortgage amortization to 30 or even 35 years. For the self-employed household, having 20 percent down is no longer ideal. A down payment of 35 percent is.
7. There is a difference between how much house you can afford and how much house you should afford - and this distinction is more personal than anything. My rule is; never go to the total maximum because you'll feel pinched eventually.
8. Finally, we're in record-setting low-rate territory, which has been the case for over four years. When doing your mortgage calculations, I recommend you use rates that are 0.5 to 1.0 percent higher than today's rates (meaning 3.5 to 4 percent) when figuring out your affordability. As we say in the industry, it's not a matter of IF rates go up, it's a matter of WHEN. You need to be proactively prepared.
In a city like Toronto, where property prices (and the potential debt) can be substantial, it is important to be strategic in your purchase, to make sure that it suits both your housing and financial objectives in the short, medium and even long term. At urbaneer, we make a point of looking beyond the actual transaction, and realize the multi-dimensional nature of a property purchase. It's how we invest in our clients to help them invest in their present and their future. We're here to help!
~ Steven and the urbaneer team
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