Establishing your budget and your borrowing capacity


Before you begin your search for a new home, there is one vital step you must complete, which is to establish a realistic budget that takes into account:

your lifestyle
your goals
your down payment

This will enable you to set a reasonable purchase price based on your situation, and help you focus your search to avoid being tempted by a property that is beyond your means.

Mortgage pre-approval


At this stage, you can contact a mortgage broker who will inform and guide you through the various options available to you, including obtaining a mortgage pre-approval.

Although a mortgage pre-approval is optional, it has many advantages:

  • It allows you to determine the maximum price you may consider based on your borrowing capacity and your down payment;
  • It allows you to lock in a mortgage rate; and
  • It shows your legitimacy as a potential buyer.

GOOD TO KNOW

You will still need to obtain a final mortgage approval based on the terms of your Promise to purchase.

Calculating your monthly housing budget


This budget is the amount you have available to live in, finance and heat your future home, once you have fulfilled all your other financial obligations, taking into account:

  • Your net household income;
  • Your debts (student loan, car loan, etc.);
  • Your current expenses (food, clothing, insurance, miscellaneous expenses, etc.)

The difference between your net monthly household income and your total monthly current expenses (including your debts) is your monthly housing budget. This amount must cover your monthly mortgage payment (principal plus interest), property taxes and heating costs (and, if applicable, 50% of your co-ownership fees).

Calculating your down payment


The amount you have as a down payment will have a direct impact on the amount you will need to borrow to purchase your new home. Remember that the higher your down payment, the lower your mortgage payments will be. However, you must also have money for expenses to acquire, install and furnish your new home.

If your down payment represents less than 20% of the purchase price, your mortgage loan will have to be insured by a company that provides this type of insurance, such as:

The premium for this insurance can be paid in cash or added to the amount of the loan based on a percentage that varies according to risk. The provincial tax on this premium is payable at the time of signing before the notary.

For an income property, you may be required to make a larger down payment.


For a secondary residence, a minimum 20% down payment is usually required.

How much to borrow?


To calculate the loan amount required, you need to know the purchase price and the amount of your down payment:

Purchase price

The remuneration payable to your broker under your Exclusive Brokerage Contract – Purchase can be added to the purchase price and included in the amount of the loan, subject to certain conditions.

Down payment amount

The down payment is the cash you have in hand toward the purchase of your property: you can subtract it from the purchase price since you will not need to borrow that sum.

TALK IT OVER WITH YOUR MORTGAGE BROKER

What are the rules for a successful financing in your case?

Calculating indirect costs

When calculating your down payment, remember to consider the cash you will need for indirect costs and expenses such as:

Building inspections and other expert reports

$

Legal and notary fees

$

GST/QST 
(new construction or other taxable properties)

$

Property transfer tax (welcome tax)

$

Adjustments and tax distribution

$

Water quality and quantity certification (artesian well)

$

Tax on mortgage insurance premium

$

Moving expenses

$

Renovations and repairs

$

Furniture, appliances, carpets, paint, etc.

$

Utility hookup (new construction)

$

Other (ex. Bell, Videotron, etc.)

$

Total

$

Summary of calculation


Once you have reviewed all the costs related to the purchase of your property, you can make your final calculation:

Enter the purchase price of the property;

Subtract the amount of your down payment (including any deposit you paid at the time when you made your Promise to purchase).

The total will be the amount of financing you need to purchase the property.

Interest

The interest is calculated on the amount of your loan and based on your credit history, at current market rates. Interest rates are influenced by multiple economic factors, and their behaviour is difficult to predict.

Under CMHC’s recently introduced mortgage stress test, the borrower must demonstrate that he is able to repay the mortgage at the higher of the rate on his loan agreement plus 2% or the five-year fixed rate posted by the Bank of Canada. If mortgage loan insurance is required (by CMHC for example), the premium is taxable. This premium will be added to the amount of the mortgage loan, increasing the amount you will have to repay to the lender.

Amortization, term and payments

Amortization: The number of years required to repay the entire loan, usually between 10 and 25 years.

Term: The period for which the conditions of the loan (rate, repayment terms) are valid, generally between six months and five years.

Payments: They can be monthly, bi-weekly or weekly and are established based on the term, amortization and interest rate of the loan.

Types of loans

Different types of mortgage loans are available on the market: open, closed, variable, fixed... With the help of your mortgage broker, you will decide which type best fits your needs.

Home Buyers’ Plan (HBP)

If you are buying your first home, or if you have not owned a principal residence in the last five years, the Home Buyers’ Plan (HBP) may offer an interesting avenue for you. For more details regarding the HBP, visit the Canada Revenue Agency website.