- In this video you'll learn how much mortgage
you can afford and how it's calculated.
That's starting right now.
- [Announcer] Welcome to Homebuyer's School
brought to you by Brookfield Residential.
- Hi everyone, I'm Karl.
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So today I'm joined by Mujtaba Syed,
mortgage specialist for the Bank of Montreal
and the question we're gonna answer today
is how much mortgage can I actually afford?
How would you know that?
Do you use the calculators online?
How would you start and I guess
how do the banks actually calculate that?
- First find out what you're comfortable with
at the monthly budget before you even look
at calculators or anything like that.
Cause calculators we just look at numbers, right,
we don't look at certain lifestyles,
we don't look at stuff that we don't
consider to be mandatory payments.
So first and foremost set a budget for yourself
that you're comfortable with every month
no matter what happens so you can pay.
Say you fall sick or you get an injury,
you want to travel, you want to make sure
that you can pay that mortgage no matter what.
That's the first step.
The second step is going through a pre-approval process.
So most banks if your credit score
is the optimal credit score, which is 680 or higher,
we will look at 44% of your annual household income
for all your debts.
That includes the mortgage payment, property taxes,
utilities, any condo fees that might be there,
any other debts that are mandatory debts.
And the reason why the bank do that
they want the other 56% available to you
just in case there's some unforeseen circumstances
you do have a little bit of a life,
something that we don't consider to be called mortgage poor,
you have some savings, so a lender in Canada
will not go over 44%.
Some lenders might make a discretion
on a case by case scenario, but it won't be
an insured mortgage with CMHC.
It will be a conventional mortgage
and every lender has their own discretion that they'll do.
Now sometimes people will come back to me
and say, "Listen, my total debt ratio is only 40%
"and I'm still not getting approved,"
because there's also a gross debt ratio
that we take a look at.
You might have zero debts, but this house
it's now gone over a threshold.
So only your housing cost, which is your mortgage payment,
property taxes, utilities, condo fees,
they can't be more than 39% of your income
if you have the optimal credit score.
Now if you go up to 40% once again hard stop.
CMHC will not take a look at it
even if it's 39.01, right.
It's 39%, that is a hard stop for just gross household debt.
Total debt 44%, you don't want to go over
if you have a normal credit score.
- So you only have actually 5% extra
of the 39% of total debt.
So if you have like a car loan and credit card loans
and if you're kind of maxed out
you're kind of out of luck then, right?
- You're kind of out of luck, but not necessarily.
You can find a co-signer, you can find other options
or maybe you decide this house is too expensive for you.
Maybe you find something that's a little bit closer
to your budget.
You might want to reduce the purchase price
by a certain 50, 60,000, maybe 10, 20,000
depending until you get those ratios in line
so you can comfortably afford it.
Those ratios are in line to protect you
and the bank, but mostly you
so you can afford those payments.
Those 56% is available to us God forbid anything happens.
That breathing room is very, very important.
So it might not get you into the perfect home,
but it'll get you into a home that you're comfortable with.
It's very difficult for a lot of people
to get into the dream home right from the get go,
but maybe take it as a step by step approach,
get into something you can afford, it's comfortable for you,
do it for a couple of years, reassess your situation
and then look from there
and see what you want to do after that.
- We actually have a great video
where we talk about everything in terms of TDS,
gross debt ratio, everything in terms of credit score.
We're going to leave that video up here
and in the description below for you to watch.
So how did they come up with that 44%?
Why isn't it 45%, why isn't it 50%?
Like what led to that percentage?
- It's hard to say, but I think the bank account
just thought that 44% is the ideal number
where it's not too risky, gives you the ideal
purchasing power without going slightly overboard
and keep in mind this is across the board, right,
it's not just based on one specific person.
So it's a safe number to use for everybody
and needs to kind of follow the same guidelines
and then that is the reason why
and I think it is because the last thing they want you to do
is go into a house that you can't afford
and unfortunately now you are struggling to make payments,
you are struggling to make ends meet.
You might be making the mortgage payment,
but now you're having issues with your car payment
or you're having issues with your grocery bills.
Like those are things we don't want.
We want you to be comfortable in every aspect of your life
and getting the perfect home right within those ratios
is a big part of it because your biggest expense
is going to be your living expense
which is your mortgage expenses.
It's one of the biggest expenses that you have in your life
and that has to kind of fit with your lifestyle
and your income.
- In the terms of when you talk about 39%
total home debt, right, like home payment.
- Gross debt.
- Gross debt, that 5% does that mean
let's say you have a car that's worth 20,000
is that included or just the monthly payments?
- We do look at it to see what kind of debts you have,
but more important than that is see what
the monthly payments going out
with your monthly income coming in.
So your monthly payment per month
will impact your ratios more than what the balance
of the debt is at that time.
- How much does your income actually
play into the calculations of how much
mortgage you can afford?
- 100%, your income is a major deciding factor
in your monthly obligations, right,
because you have a certain level of income
that comes up every month and from that
a certain goes towards your debts.
So we take a look to see how much is left
after those debts are paid
to see how much you can afford.
So your income is a very, very strong factor,
one of the very important parts of the five Cs of credit,
which is capacity is to look at the income.
- Got it.
And do you have anything else to add
in terms of how much mortgage you can afford?
- Take a look, right, assess your situation.
You can explain to the lender, "Listen this might seem
"like it's too expensive for me.
"It's right on my ratios,
"but hey listen I just graduated.
"I'm a professional.
"My income potential is gonna rise over the years
"so it's gonna be a lot more comfortable.
"I'm expecting a big raise pretty soon,"
that maybe the lender doesn't know about.
All of that stuff can play a big factor
into helping you get approved for that loan
if you're close to your limits.
And if you're already close to your limits
maybe stay a little bit under those limits, right.
You do want to be comfortable with your monthly budget.
You don't want to overextend yourself or overpay.
You always want to be comfortable
and you want to be able to live your life, right.
That's a very, very important part.
- And I think probably what you want to know
is what are some programs to help you
with your mortgage payments and I'm gonna leave a video
up here and in the description below
talking about all those payments,
especially for first time home buyers who want that help,
right, in terms of getting a mortgage approval.
So if you want to know more about the mortgage
approval process we've got a great video series here
on understanding the steps required for mortgage approval
as well as a great video series here
on understanding mortgage rates.
And don't forget to subscribe to keep learning
from the experts and I'll see you in our next video.