How Much Mortgage Can I Afford?
Create a Home Buyers Plan That Works For You!
So you’ve made the big decision to buy a new home and are now in the process of looking at mortgage loan options for your home purchase. But you may find yourself asking: How Much Mortgage Can I Afford?
Your mortgage is a huge step in your home buying journey, so understanding how your mortgage can ultimately affect your financial health is incredibly important. At River City Financial, we help clients understand the Bank of Canada’s stress test rules, the difference between types of mortgage interest rates such as a fixed mortgage or a variable mortgage, as well as identify the pros and cons of options like a reverse mortgage. Basically, we are mortgage educators as well as brokers!
There are lots of hidden considerations and nuances you may not have considered before now. Buying a new home at the top end of your purchase price could be setting yourself up for some potentially tight financial years in your future. Why? Because your home cost is more than just a mortgage payment. Don’t forget about property taxes, home maintenance costs, utilities, and more that are due every month. Making sure all of these costs add up to only 35% of your total income means you’re on the right track. If not, you might have to make some sacrifices in other areas of your life like vacation, debt payment, or savings.
The following budget breakdown that will help guide you towards a mortgage you can afford:
Your housing costs should account for no more than 35% of your annual income. This includes your mortgage amount, any annual taxes, your gas and electrical bills, etc. Any home maintenance costs should also be worked into this category of your budget as well – renovations and lawn care included!
Car payments can take up a big portion of your income. However, it’s not the only expense that you should be keeping track of. If you own a vehicle don’t forget to include insurance costs and gas expenses. Any car maintenance would also fall into your transit budget. Using public transit, taxicabs, or ride sharing services are also a transit cost. Try to keep this at 15% of your income.
Your day-to-day needs are a big part of your budget (think: food, medical care, and childcare). The life portion of your budget should also include any fun and entertainment – like movie nights, coffee dates, and shopping for new clothes. Plus, that yearly family vacation you are hoping to take would also be included here. Aiming for this category to be at least 25% of your household income is ideal.
Planning for 15% of your income to go towards debt payments is a critical portion of your budget. Ensuring your payments are ready and on time for your credit cards and credit lines will help keep your credit score in check.
A long-term savings plan should be incorporated into every individual’s budget plans. Every paycheck, plan for at least 10% to go straight into a savings account. Making this an automatic withdrawal each month right when you receive your pay will make it easier to stay on track.
Need help fitting a home into your monthly expenses? Contact a mortgage specialist at River City Financial for help today!