How Much Mortgage Can I Afford? Calculate Your Budget

You’re interested in buying a house and you find yourself asking yourself the obvious question: What is my budget? Whether you’re buying your first home, upgrading, or downsizing, there are lots of considerations. How much mortgage do I take on? How much mortgage should you get? How do mortgage calculators work and what do all of these terms mean? Let’s break it down. 

Mortgage Variables and Factors

Mortgage calculators can help you determine what mortgage is right for you, but they require inputs. The nature of your mortgage commitment will depend upon numerous factors, so it’s worthwhile to overview a few of the pertinent variables.

Purchase price: Obviously the more expensive your home is, the greater your financial commitment. 

Down payment: A down payment is the amount of money you put towards your property up front, from your own resources. A larger down payment will naturally reduce the amount of your mortgage while also potentially qualifying you for better interest rates and exempting you from mortgage insurance. 

Interest rates: Dictate the cost of borrowing and payment amount for your mortgage. Rates regularly fluctuate with the market but how the fluctuations impact your mortgage depends on the interest type (see below) you select. 

Interest type: You can choose to apply for either a variable or fixed interest rate. Fixed interest rates will remain constant throughout your term, providing payment certainty throughout the duration of your term. Variable rates will rise and fall according to prime rates. The latter approach has historically resulted in lower rates, but they place the borrower at the mercy of fluctuating interest rates. 

Interest term: This refers to the period of time that you lock in your chosen interest rate and type. Most common is a five-year term. After this period expires you’ll be free to negotiate with a lender of your choice before entering another term. You’ll do this throughout the duration of your mortgage amortization period. 

Amortization period: This is the lifespan of your mortgage. Most common is a 25 year period and this is the maximum term allowable for someone whose down payment is less than 20% of the total purchase price. 30 years is the maximum allowable amortization period for any mortgage. Some buyers choose periods of less than 25 years – which results in higher regular payments – but this strategy would allow you to be free of your mortgage more quickly, with a lower overall amount of interest paid. 

Payment frequency: monthly mortgage payments are most common, although other options are available, including accelerated payment options that reduce your amortization period ahead of schedule. 

How Do Mortgage Calculators Work? 

A mortgage calculator uses the above information to provide you with an overview of your financial obligations under a host of different circumstances. Houses are listed by total purchase price, but mortgage calculators tell us about the nature of our monthly commitments, which is often more relatable and relevant information.  

Pinsky Mortgages offers two free mortgage calculators for your use. The Mortgage Calculator BC allows you to view information depending upon the aforementioned variables, with a particular emphasis on the effects of additional prepayments on the overall scope of your mortgage. 

The mortgage affordability calculator allows you to reverse engineer mortgage information according to one of three variables: annual income, purchase price, or total monthly payment amount. For example, if you input your annual income, the calculator will suggest a suitable purchase price and give you a picture of your monthly commitment. If you input a purchase price or total monthly payment amount, the calculator will give you information on the other two variables. 

How Much Mortgage Do I Qualify For? 

Each lender has their own criteria for loan qualification, but they all revolve around similar factors. A higher salary, a larger down payment, and less existing debt will all work in your favour. Good credit history will help you qualify for more favourable terms. 

There are some general rules of thumb that financial advisors adhere to. It’s often recommended that your total mortgage not exceed 2.5 times your gross annual income. Your front end ratio, or mortgage, property tax, heating and any condo fees (if applicable) to income ratio, refers to the percentage of your gross income that goes toward paying your mortgage. 39% is the ceiling for this number for most, but we can go as high as 44%. Your back end ratio, or total debt to income ratio, includes credit card debt, auto, and student loans and other forms of payment obligations. 44% is the base number here. The amount a lender is willing to approve you for may be lower or higher than the number you calculate based on these ratios.

A mortgage broker, like one from Pinsky Mortgages, would be able to help you with your qualification and affordability ratios.

How Much Mortgage Should I Take On? 

While the previous calculations are mathematical in nature, this question involves some soul searching. Some people are comfortable dedicating a large portion of their income to their mortgage, while others want to ensure that they have ample budget left over for travel, entertainment, and other elements of life. 

It’s also important to remember that home ownership has other costs not directly associated with the mortgage. Even in cases where property taxes and insurance are built into the mortgage there are bills to pay. Renovations and maintenance are both factors. Furnaces die. Condo fees may be an obligation. In the end it’s all about your lifestyle and personal goals. Just because you are offered a certain amount of money doesn’t necessarily mean you should take it all. 

Pinsky Mortgages believes in crafting individual solutions that are best suited for each of our clients. We value education and personal service and we work for the borrower (not the lender). Our services are free to you, which makes it an obvious choice to work with a mortgage broker such as Pinsky. Book your free consultation today and let us help you make an informed decision that will fit your unique situation.