What Size Mortgage Can I Afford?

This is one of the most frequently asked questions about mortgage finance. Since everyone wants to know this amount, I've calculated it as simply as possible.

First, a bank always looks at expenses monthly. Never annually, so if you are self-employed, you can easily use these steps to calculate what you qualify for by dividing your total annual income by 12.

Let us break it down into steps:-

STEP 1: Understanding your financial institution's terms & conditions:

First, speak with your banker to thoroughly understand the terms and conditions of their mortgage product. Ask questions such as: What is your maximum TDSR? How do you determine the length of the mortgage you assign to a client? What is your typical interest rate?

An example of a response to these questions might be:-

TDSR (or TDS) is 45%

The length of the mortgage, also referred to as the loan tenor, cannot exceed the country's retirement age; let us say, in this example, 67 years old; however, if self-employed, we might go to 70 years old.

The typical interest rate might be around 4% variable or 5 % fixed for 3 to 5 years.

STEP 2: Assign these figures to your specific situation

It is very important that you now assign each of these answers to your specific situation. Let us look at a simple example:-

You are 40 years old and your monthly salary is $4,000. Since you are risk averse, you take the 5% fixed for five years.

The TDSR (Total Debt Service Ratio, sometimes called TDS) is 45%, so your maximum borrowing capacity is calculated below. Some banks' TDSR (or TDS) is 40% so that this figure could be lower. Understand that the higher this percentage is, the better your borrowing capacity will be.

TDSR: $4,000 * 45% = $1,800 monthly

Length of loan: 67 years old - 40 years old = maximum loan tenor is 27 years

The interest rate is 5% fixed for 5 years!

I want us to pause here for a second because these figures are huge, and if you understand this, you are on your way to understanding how banks assess loans. This $1,800 represents your total debt/obligation amount. In other words, your total monthly commitments should never exceed this amount.

What commitments are considered by most banks? See below:-

• Existing loan payments, e.g., your car loan payment, overdraft, PLOCs, personal loans
• 5% minimum payment on your existing credit card limit, e.g., if your limit is $2,000, then your 5% commitment if you maxed this card out is $100 monthly
• Monthly land tax amount for the proposed property being purchased. This can easily be estimated based on the property's value, or the current property owners can provide this figure.
• Any condo or maintenance fee you need to pay for the proposed property
• Any court obligations, e.g., monthly child support

Please note that your bank might choose to use additional types of commitments. Understanding what is being looked at for your specific situation is important as there might be room for you to reduce figures to qualify for a higher mortgage.

STEP 3: Determine your monthly TOTAL commitment figure based on your specific situation.

A useful tool at this point is your credit report. You should never approach a bank without first reviewing this report. There might be errors on this report that you should address, or there might be loan facilities that you may choose to close BEFORE approaching a Bank. Message me if you require guidance on how to pull your credit report based on the country in which you reside.

Based on your monthly commitment figure, this $1,800 will be reduced. If you do not have any of these above expenses (which is impossible because, by minimum, you will have to pay land tax), then you can comfortably say this is your maximum mortgage monthly payment.

So, how do you work out your total mortgage amount?

You can use the below equation if you are mathematician-inclined:-

OR

In this scenario, you can enter figures in the amortization calculator below until the monthly payment is equivalent to your TDSR calculated amount, i.e., $1,800.

You can find this calculator at Amortization Calculator.

STEP 4: Does your Bank require an injection in mortgage facilities?

If your bank offers 100% mortgages (i.e., they do not require an injection), then you can qualify for $320,000.

If your bank offers 90% financing (which means you have to inject 10% of the property's purchase price), then you can purchase a house for more than $320,000. This means you can purchase a property with a price point of $355,000. I calculated this amount using the Excel format below.

I hope the above calculations assist you in understanding the Banking process.

Knowing what you would qualify for is important before you start working with a real estate agent.

Another point is that just because a Bank qualifies you for a $320,000 mortgage does not mean you should get a mortgage for this maximum amount. You may have your own financial goals that determine what this figure looks like for YOU! It is important to have this conversation with your trusted adviser.

Message me if you have any further questions.