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a mortgage you can afford

So, this afternoon, you just happened to stumble upon an open house in a neighbourhood you love. And now you just can't stop thinking about this house. It's perfect — from the hardwood floors to the funky bathroom sink. But can you afford it?

The first step is deciding how much you can pay as a down payment, and that will help determine the kind of mortgage you can apply for. With a high-ratio mortgage, now you can pay 0 per cent of the purchase price for your down payment. This type of mortgage must be insured through organizations like Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Inc. (Genworth), and an insurance premium will be charged to you as the borrower. Conversely, with a conventional mortgage, your down payment must be at least 25 per cent of the total purchase price. So, if you've got your eye on a $200,000 bungalow, you need at least $50,000 in savings for a down payment to apply for a conventional mortgage.

You think about borrowing from your RRSP, you toy with the idea of selling some investments, you check the balances in your bank accounts, and you realize you have enough for the down payment.

Now, the question is whether or not you can make monthly payments on a $150,000 mortgage (the $200,000 purchase price minus the $50,000 down payment). Like many financial decisions, the answer begins with weighing how much you earn against how much you spend. Ask yourself:

What is my income before taxes?
What are my spending habits? Think about your living expenses, including items like groceries, child care, and entertainment. And don't forget to consider car loans or leases, credit card debt, and regular savings programs like RRSP contributions.

What you have left over is money that could potentially be spent on housing. Remember, monthly mortgage payments aren't the only costs associated with owning a home. It's also important to consider, among other things:

Property taxes
Utilities, including heating, gas, electricity, water, telephone and cable
Property insurance
Maintenance costs

Finally, ask yourself what level of debt you're comfortable with, keeping in mind that your lender may have specific requirements about how much debt is acceptable. As a rule of thumb, many lenders believe your monthly debt load shouldn't exceed 40 per cent of your monthly gross income.

a mortgage you can afford

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