Let’s be honest — buying your home, although exciting, can be an extremely daunting experience, especially in this hot Canadian housing market. The range of emotions, from excitement to exhilaration all the way to apprehension and sometimes, disappointment, can be a lot to process, especially with everything else you’ve got going on in your life. At Pineapple, our core mission is to help you navigate the home-buying process, and as an established network of mortgage brokerages, we know the ins and outs and the ups and downs of it all — and we’re here to help.
The first step in your home buying journey should, unsurprisingly, be to answer a simple question: how much mortgage can I afford? You need to determine how much debt you can take on through your mortgage. By the end of this post, you should learn more about the lender evaluation process, how much mortgage you can afford, and other important considerations to keep in mind before you secure your mortgage and ultimately, move into your new home.
In Canada, there are a few different ways to obtain a mortgage, through what we call lenders. The most common lenders are the big Canadian banks, however, there are also independent lenders that home buyers can look to secure their mortgage from. At Pineapple, we work with several lenders, including the big banks, to help you navigate the complexities of finding the right mortgage product for you.
How Lenders Evaluate Risk And The Mortgage “Stress Test”
Lenders use a variety of factors to ultimately determine how much money they can lend you for your mortgage, and in recent years, the rules have become even more clear. As the Canadian housing market has been rapidly growing over the past few years, the government has introduced a universal mortgage stress test that home buyers have to “pass” before being approved for their mortgage. High-level, as mortgage interest rates are at historically low rates, lenders need to have confidence that if and when rates increase, or if you or your partner lose your job, that you’ll be able to continue making your monthly payments. To conduct the stress test, the Bank of Canada determines a qualifying rate, which, as of June 2021, was 5.25%. To pass the test, considering your income and debts, you must be able to make your monthly mortgage payments at a rate of two percentage points above the qualifying rate.
In addition to the stress test, lenders take your overall income, your credit score, the size of your down payment, and your debt and liabilities to calculate how much mortgage you can afford. It is widely recommended to get pre-approved for a mortgage before you start searching for your new home so that you can look for a home that you can afford.
How Much Mortgage Can I Afford? Determining Your Threshold
Your mortgage broker or lender will help you determine how much mortgage you’ll be approved for, however, there are other factors that you must consider before making your home purchase to ensure that you can maintain your quality of life and be prepared for the unexpected costs sometimes associated with homeownership.
In addition to your monthly mortgage payments, you should consider your other financial obligations, such as condo fees, car payments, savings, credit card and loan payments, home insurance, and childcare; as well as your lifestyle costs, like gym memberships, your spend on restaurants or other forms of entertainment, and larger costs like vacations. Additionally, consider the one-time cost of land transfer taxes, home inspections and closing costs as well as upgrades and repairs to your home.
If your finances are in a healthy condition, you may very well be approved for a higher mortgage than you expected. However, it’s important to be realistic about what you can afford, considering the above, to ensure you can maintain your quality of life and keep yourself in a strong and manageable financial situation.
Overall, being knowledgeable and prepared will help you make the best decision as it pertains to securing your mortgage and purchasing your home. With today’s hot housing market and the reality of bidding wars, when you are ready to make an offer, it’s imperative to maintain a pragmatic state of mind and resist the temptation of entering a bidding war that will put too much pressure on your finances and ultimately leave you in a less than desirable situation.
At Pineapple, we see the market from a holistic point of view, partnering with multiple lenders (including the big banks) in order to provide exceptional service and find the best rates for our clients. Our experienced mortgage agents operate with a high level of knowledge and integrity, and it’s our mission to ensure you find the right mortgage product, and the right mortgage volume, so that you can enter homeownership empowered and confident.
For more information and resources on securing your mortgage, visit our First Time Home Buyers page or get in touch with a Pineapple mortgage agent.