How much should I borrow?
The first thing you’ll need to decide if you are going to buy a home is how much you can afford to borrow. The interest and mortgage types play an important role in determining your ability to repay the loan. Changes to the term can help reduce monthly payment but will also drive up the costs of the interest. You should not rely solely on the mortgage lender to determine what loan amount is reasonable for you. In addition to the mortgage terms and rates, the potential buyer should also consider their personal situation and possible worst case scenarios to ensure that the best financial decision is made.
Your capacity to repay the loan amount is directly tied to your personal income. If you are married, you’ll want to consider whether both your incomes are necessary to make the monthly payment, and what your options would be in the case of a divorce. Other things to consider are what your situation would be if there was a job loss, i.e., how long would you be able to maintain the payments using savings, etc.
It may be necessary to make some concessions to your lifestyle to purchase the home of your dreams. If there is little room within your budget to (comfortably) cut your personal expenses, you may need to lower your sights to a more affordable housing option.
In addition to considering the amount of your current debt, you should also consider debt that you are likely to incur in the future. Purchasing a car, paying for college are some examples of necessary debt that could impact your ability to make your home loan payment.
Another factor to consider is how much debt, and the resulting payment amount, are you going to be comfortable paying. For instance, if you place a premium on having available cash, then you may not be happy with a high monthly payment.
Property ownership comes with a set of responsibilities necessary to keep up the appearance and value of the home. Roofs and carpets need replacement and repair as do windows and doors. If too much of your income is being spent on loan payment, repairs can become difficult or impossible.
Heat, electricity, water and sewers are additional costs that need to be considered in estimating the amount of debt that is reasonable to incur.
In some cases, there may be additional homeowner fees that must be on a yearly basis. Condominium and some housing developments require the fees to pay for amenities. Ratesheet.ca has a variety of calculators and tools available to help you calculate the difference between the costs of renting and buying that may be helpful in determining how much to borrow.