Do You Have the Financial Means to Buy a Home?
Article revised on 28 July 2017
Before you go off in search of your next home, you should know what kind of purchasing power you have. What can you afford? If something unexpected happens, do you have the financial flexibility to cope with it?
Here are a few ways to help you evaluate your financial capacity.
The down payment: no way around it
In Canada, if you want to become a property owner, you must make a down payment of 5% of the purchase value of the property. In an ideal word, the funds should come from your savings.
Alternatively, you can turn to the Home Buyers’ Plan, commonly known as the HBP, which lets you “borrow” funds from your RRSP to use as your down payment. To find out more about the HBP, please refer to our article on the subject.
The Mortgage Loan Insurance
If you can’t put down the magic number of 20% of the purchase value of the property as your down payment, you will need to pay a mortgage credit insurance premium.
The Mortgage Loan Insurance is not life insurance, but rather an insurance that will cover your loan in the event of default on payment. Issued by the CHMC or a federally accredited private insurer, the premium is paid in one payment by the borrower during the transaction.
The percentage of the down payment paid determines the percentage of the mortgage credit insurance premium to be paid. It can vary from 1.8 to 3.15% of the loan value.
The mortgage loan: many options
Many financial institutions can help you with your purchase by granting you a mortgage loan. They will offer you several options in line with your objectives and financial profile.
The mortgage loan they grant will not usually exceed 80% of the value of the property you’re looking to buy.
- The loan can have a fixed or variable rate. The rate for the former is usually higher but remains constant, while the latter fluctuates according to the market
- The term can go from six months to 10 years
- The loan can include an amortization period for a maximum of 25 years
There are many criteria which determine whether you will be granted a loan, including your:
- Credit rating
- Debt ratio, which should not exceed 32 to 44% of your gross income, depending on the financial institution
- Down payment
The mortgage line of credit: pros and cons
The mortgage line of credit works much like a personal line of credit. You can borrow money from it whenever you like, up to the credit limit that you’re granted.
You can pay it back as you see fit and then borrow from it again. This set up has many advantages: lower interest rates, and easy and quick access to funds without having to renegotiate with your financial institution and flexibility when it comes to payments.
However, to get the line of credit, you must have an impeccable credit report on top of making a bigger down payment. The down payment must be equal to at least 35% of the property’s value.
The net value of your home: the trampoline effect
If you’ve owned a home for several years now, you can fall back on its current net value to get new refinancing.
This can be useful when:
- You’re thinking of refinancing your property to do renovation work, for example. In this case, you can borrow up to 80% of the estimated value of your home.
- You would like to make a bigger down payment on the purchase of a new home, and by doing so, avoid paying the mortgage credit insurance premium.
- You plan on buying a secondary property and obtaining a second mortgage.
In all these cases, you would be better served consulting a mortgage financing advisor. He or she can help you make the best decision based on your current situation.
Need more information?
Contact one of our financial security advisor!