“How much home can I afford to buy?” That’s often the biggest question people have when they’re looking to take on a Toronto or Ottawa mortgage. And while the first thing they do is often to jump onto an online mortgage calculator and try to figure it out, there is a much simpler way – but is it a good one?
Jeff Schwartz, executive director of Consolidated Credit Counseling Services of Canada, says that Canadian homebuyers should calculate 30% of their net income (not gross) and use that number to decide how much home they can afford. Mr. Schwartz says that, even though lenders will usually use 40% of your gross pay as their lending criteria, homeowners will only be working with their net pay, and so this is a much more realistic number to use, and he even suggests going as low as 25% of your take-home pay. So what are the benefits of doing this?
The first and biggest benefit is that you’ll most likely always be able to pay your mortgage – even if interest rates were to rise significantly. Because your dollar won’t already be stretched to its maximum limit with that mortgage that’s eating up 40% of your income, you’ll have enough wiggle room for whatever comes your way.
The second benefit is that this formula will allow homeowners to save at least 10% of their income off every paycheque. Because they didn’t take out the full mortgage amount they would have been approved for, these homeowners have extra money in their budget and that can easily be set aside for retirement savings or a tuition fund.
But, while it may look good on paper (even if it doesn’t sound good for those looking for that mansion of their dreams,) is the 30% formula really a good one to follow? And will it really save homeowners that much money?
Not according to some Toronto mortgage brokers. David Larock says that when people buy a home that’s too small for them, it eventually ends up costing them even more money when they find they have to move. “Moving is bloody expensive,” he says. “You have to pay real estate commissions and land transfer taxes, you’ve got to move everything. Being ultra-conservative can sometimes end up causing more harm than good.”
What do you think? Is it better to save your money from the get-go by being more prudent with your mortgage calculations? Or should you buy as much home as you can in order to save yourself on costs in the future?
