What can you afford?
 Before
you start looking for a new home, it is important that you become aware
of how much you can afford to pay. This knowledge will allow you to spend
your valuable time looking productively at home which are within your
predetermined price range.
You can calculate a relatively accurate figure for yourself
if you assemble the following information:
-
The CASH you have saved to be used for this home
purchase
called the DOWNPAYMENT
-
Plus the amount of BORROWED MONEY you are able
to
arrange
-
Less CLOSING COSTS and other "last minute"
costs
associated with a real estate purchase
-
Equals: Maximum Price
The Downpayment:
Lending institutions will require you to make a downpayment of at least
5% to 10% of the purchase price of the home. Lending Policy may vary from
time to time.
 However, as a general
rule, you should make your cash downpayment as large as possible. The
less money you borrow, the smaller your monthly payments. Your deposit
will form part of your downpayment.
The Borrowed Money:
Almost everyone who purchases a home borrows some of the money needed
to pay for it. The easiest way to determine how much money you will be
able to borrow as a mortgage loan is to consult with one or two lending
institutions.
These lenders will apply standard tests, based on your
family's current income and debts, in order to decide the amount of money
they will lend you. They will ask for information about your finances
and make a thorough credit check, in order to be sure you are able to
repay a loan.
How much can you afford to pay in mortgage payments?
Based on your income:
Allow no more than 30% of your gross monthly income (before deductions)
to make your monthly housing payments. This test of your ability to repay
a mortgage loan is generally referred to as the Gross Debt Service
Ratio.
Complete the following calculation to determine the approximate amount
you will be able to spend for the mortgage payment, the property taxes
and, where applicable, 50% of the condominium maintenance fees. Some lenders
will require that this total maximum monthly payment also covers heating
costs.
-
Your gross monthly income
-
Plus spouse's gross monthly income
-
Plus other income (Monthly, potential revenue)
-
Equals total monthly income
-
Multiply the line above by 30% to calculate your
TOTAL MONTHLY MAXIMUM HOUSING PAYMENT
Based on your Other Financial Obligations:
If you have other monthly financial obligations, such as car or credit
card payments, the lending institutions will also apply the Total Debt
Service Ratio test to determine the maximum mortgage loan for which you
can qualify:
-
Your Monthly Housing Payment(as calculated previously)
-
Plus your Monthly Debt Payments(car, credit card,
etc.)
-
Equals your TOTAL MONTHLY PAYMENT
The total of your monthly housing payment added to your
other monthly debt payments should not exceed 40% of your monthly gross
income. The Gross Debt Ratio and the Total Debt Service Ratio tests protect
both you and the lender by ensuring that you do not take on more debt
than you can reasonably afford to repay.
Many lending institutions will prequalify you for a specific size and
type of mortgage loan before you begin searching for your new home. Taking
the time to apply for a pre-approved mortgage will give
you the security of knowing how much you can afford to spend. Before concluding
the loan agreement, most lending institutions will require an appraisal
of your selected property. The appraised value is a professional opinion
of the value of the home and may differ from the purchase price you are
willing to pay. The appraised value may affect the final size of the loan.
The Closing Costs 
It's easy to count your available cash but remember that all of these
cash savings cannot be used as your downpayment. There are last-minute
costs such as taxes, legal fees, appraisal fees, moving expenses and house
insurance to pay before you are finally in your new home. The time for
you to budget for those "end" expenses is NOW. You must be prepared
to pay most, and perhaps all, of the following closing costs.
Property Purchase Tax:
The British Columbia Provincial Government imposes a property purchase
tax which must be paid before any property can be legally transferred
to a new owner. The tax is 1% on the first $200,000 of the property value
and 2% on any value over $200,000.
Goods & Services Tax:
If you purchase a newly constructed home, you may be subject to 7% GST
on the purchase price. However, if the home is under $350,000, a rebate
will reduce the GST paid to 4.48% of the purchase price. If the price
is over $350,000 the net GST to be paid increases gradually until it is
a full 7% at amounts over $450,000.
Property Tax:
If the current owners have already paid the full year's property taxes
to the municipality, you will have to reimburse them for your share of
the year's taxes.
Appraisal Fee:
When the lending institution requires an appraisal of the property before
approving your loan, it may be your responsibility to pay the appraiser's
fee.
Survey Fee:
The lending institution may also require that a survey certificate be
presented to them. The purpose of the survey is to formally establish
the boundaries of the property and to ensure that all buildings are within
those boundaries. If the current owner cannot provide a recent survey
certificate, it will be your responsibility to pay the surveyor's fee.
Mortgage Application Fee:
Lending institutions may charge a mortgage application fee. This application
fee may vary between lending institutions.
Mortgage Default Insurance:
This type of insurance is required on all mortgage loans in excess of
75% of the appraised property value. It's purpose is to insure that the
lender will not lose any money if you cannot make your mortgage payments
and the value of your property is not sufficient to repay your mortgage
debt. The insurance premium is paid to the lender and ranges from 1/2%
to 3% of the loan value; however, in most cases this premium is added
to the loan amount, and paid for over the term of the loan.
Fire & Liability Insurance:
The mortgage lender will insist that you purchase an insurance policy
which guarantees that, in the event of fire, the lender will receive the
balance owing on the mortgage loan before you receive any insurance proceeds.
Legal Fees:
The transfer of property ownership from the seller to the buyer must be
recorded in the Land Title Office in order to protect the new owner's
interests. You will probably want to engage a lawyer or notary public
to act on your behalf during the completion of your purchase. The legal
fees for this service will include payment of a registration fee. If you
are financing your purchase with a new mortgage loan, there will be a
further fee to prepare and register the mortgage documents.
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