How Much can You Afford?
Before you go shopping for a home, you’ll need
to know how much you can afford to spend.
To determine this, you’ll need a clear picture
of your income and your expenses. You will also need
to know how much money you can raise for the one-time
costs of buying a home — the down payment and
closing costs.
Once you’ve created
a budget and have identified your total expenses
and income, you can make the most of any funds that
are left over. Saving for a home is a good option.
Estimating Your Mortgage Costs
The first step is to determine how much you can afford
to pay each month for mortgage payments.
Most lenders, including RBC Royal Bank, recommend
that you spend no more than 32% of your pre-tax (gross)
monthly household income on combined housing expenses.
This includes principal and interest payments, property
taxes and utilities. It also includes 50% of your condominium
fees if you are buying a condominium.
This is known as the maximum Gross Debt Service
(GDS) ratio.
If you take this amount and subtract from it your estimated
costs for property taxes and utilities (and 50% of the
condo fees, if applicable), the remainder will show
you how much your maximum monthly mortgage payment can
be.
If you have other debts, you will need to take them
into account. This is done with a calculation known
as the Total Debt Service (TDS) ratio. Basically, this
means that the money needed to make all of your debt
payments — including the house costs outlined
above, plus credit cards, personal loans and car loans
— should not be more than 40% of your gross annual
income.
Estimating Your Down Payment
Next, determine how much cash you can raise for a down
payment. The larger the down payment, the less you’ll
need to borrow and the lower your monthly mortgage payments
will be.
Remember to factor in closing costs, such as lawyer’s
fees. These are generally estimated as 1.5%–4%
of the home price.
If you can afford to put down at least 20% of the purchase
price, you’ll qualify for a “conventional”
mortgage. If you don’t have 20% to put down, you
will need to purchase mortgage insurance. This adds
an extra 1% to 3% to the cost of the mortgage.
Saving for a Down Payment
There are many sources that people draw on for a down
payment. These include savings accounts, investments,
Registered Retirement Savings Plans (RRSPs) and gifts
from relatives.
An Automatic Savings Program (ASP) can
be one of the most effective ways to accumulate a down
payment. An amount of your choosing is automatically
withdrawn from your bank account at regular intervals
(such as every payday or every month) and set aside
in an investment account. Talk to your RBC Royal Bank
Representative about setting up an ASP.
If you have been making contributions to a Registered
Retirement Savings Plan (RRSP), and you are a first-time
home buyer, you may be eligible for the RRSP First-Time
Home Buyers’ Plan. Under this government program,
first-time home buyers can withdraw up to $20,000 per
spouse from their RRSPs. This money is “borrowed” tax-free,
as long as you pay it back to your RRSP over the next
15 years.
The No-down-payment Option
Even if you don’t have any money available to
use as a down payment, you may still qualify for a mortgage,
as long as you have a steady income and a good credit
rating. With the RBC No Down Payment Mortgage™,
all you need is 1.5% of the purchase price to cover
the initial deposit and closing costs.
Why it’s Smart to Get Pre-approval
One of the best ways to determine how much you can
afford is to get a “pre-approved mortgage.”
When you’re ready to begin your home search,
we will look at your financial situation and determine
what you can afford, based on your income, expenses
and other debts. You will be pre-approved for a set
mortgage amount at an interest rate that’s usually
guaranteed for 90 days.
Getting pre-approval is not a formal application for
a mortgage, and it does not obligate you in any way.
A pre-approved mortgage simply gives you a better idea
of how much you’re qualified to borrow and helps
to ensure that your monthly payments will be affordable.
It also helps make finding a home easier because you
can limit your search to those houses you know you can
afford.
How to Get Started
An RBC Royal Bank Mortgage Specialist can answer
any of your mortgage questions, and can complete the
pre-approval process with you. You can find one through
our Mortgage
Specialist Locator.
RBC Royal Bank Mortgage Specialists are mobile and
will arrange to meet with you wherever it’s most
convenient for you. If you feel more comfortable working
in a language other than English or French, specify
that you would like a RBC Royal Bank Mortgage Specialist
who speaks your preferred language.
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for the general guidance and benefit of our clients.
This website is for informational purposes only and is
not intended to provide specific advice. See
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