Knowing how much you can comfortably afford will ensure that you are looking in the right price range for a home and prevent later financial and emotional strain.  There is no sense in falling in love with your "dream home" only to have those dreams dashed by the reality that you really cannot afford it.

 Where to look

If your credit rating is untarnished, you will have multiple options at your disposal.  Mortgage "hunting" is like any other service these days and consumers should do their homework, then shop around for the best deal available. 

Mortgages are available from several sources such as banks, trust companies, credit unions and mortgage brokers.  One should not be swayed by merely an attractive interest rate. Typically mortgage brokers used to offer mortgages to individuals whose credit ratings made conventional borrowing difficult.  While this is not necessarily the case anymore, many mortgage brokerage firms may charge you "brokerage fees" for arranging your mortgage.

Availability and after sales service should also be weighed into the equation.  Many mortgage brokers or out of town lenders may offer a rather attractive package but you had better hope that you never have a problem with your mortgage. After sales service is often lacking or nonexistent and attempting to get through on a long distance line or even a toll-free number may prove extremely frustrating. Developing a rapport with a local bank, trust company or credit union lender for your mortgage, may help to establish a long-term financial relationship. Should you have any questions or concerns, you are dealing with a local branch that is easily accessible by telephone or in person.

Here are some other important points to consider;

How much of a down payment do you have available for your purchase? Conventional financing requires a down payment of at least 75% of the total purchase price.  If you do not have 25% down payment, you will more than likely need to have your "high ratio" mortgage insured by the Canada Mortgage and Housing Corporation (CMHC).  CMHC will charge you a one-time premium (approx. 2.5%) of the total amount you are borrowing to guarantee your lending institution that should you default on your payments, they will be insured for any loss.  This "premium" may be added to the amount of your mortgage loan.

Often mortgage lenders will offer you a 60 – 120 day mortgage rate guarantee on their pre-approvals. If you obtain an interest rate guarantee, you are protected when rates fluctuate and know that your projected monthly payments will not suddenly jump.  Remember however, that you must take possession of your home within this period of time.

Are you likely to have any spare cash to put as extra payments towards your mortgage? If you are then you will need to determine what your prepayment privileges are with your mortgage lender (i.e. Double up payment capability or 10% of the principle per annum)

While you can guess as to your proposed housing expenses…could the location of your new home require you to purchase a second (or first) vehicle? If so, don't forget to add it's expense or finance charges to your calculations. Your new home may not come with appliances…do you currently own any?  Don't forget to include your legal fees in your budget as well                       (see our article on hidden costs)

Just because you pre-qualify for a certain size mortgage, doesn't necessarily mean that you should go out and buy a house requiring that amount of financing.  Mortgage "pre-approval amounts" are often misleading for many individuals and family's. 
 

Make sure that you are comfortable with your proposed PITH payments (principal, interest, taxes and heat). Add to that amount, additional monthly fees for insurance and condo fee's (if applicable). You might want to consider putting this proposed amount aside (or the difference between what you are paying now for living expenses and what you would require for the new property) for a few months to see if it becomes a strain on your budget or lifestyle.  This "enforced" savings for a few months will also provide you with additional funds to use towards your home purchase when you do decide to finally buy.

Amortization periods and interest rates play important roles as well. Another factor to consider is that while you may be comfortable with your proposed monthly mortgage repayment amount now, are interests rates currently low and likely to rise over the next 5 years?  With longer amortization periods, the rate of principle repayment is very small at first and does not substantially begin to reduce until midway through the life of your mortgage. So, if you arrange for a long amortization period of say 25 years and the interest rate is only 6% for the first 5 years, remember that when it comes time to renew at the end of 5 years, your balance will not have substantially reduced. Should your interest rate climb to say 10%, this could severely increase the size of your mortgage payment requirement to an unreasonable amount.  Your lending institution will not be able to do much to help you in this regard as most are unwilling to lend for periods of longer than 25 years and the only way that they can effectively reduce your payment requirement if rates skyrocket, is to lengthen the amortization period.

Remember that a house purchase should be an enjoyable event and not a financial burden.  Many purchasers overextend themselves based on high mortgage pre-approval amounts, only to regret their new financial commitment. You want to have money left to enjoy life, once you move in.

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