30 Mar How much can they afford?
Thorough checks come first
Postmedia News March 30, 2011
Newly minted professionals shopping for their first home in downtown Toronto are real estate agent Andrew Bodnar’s typical clients. “They see home ownership as a status symbol,” says Bodnar, an agent with ReMax Condos Plus, “and an investment.”
But young people who have just entered the full-time workforce probably don’t have large amounts money to put down.
“For a $300,000 condo, a buyer will need minimum down payment of $15,000, plus about $7,500 in closing and legal fees, which means they’ll need $22,000 in liquid cash,” Bodnar says.
And they’ll need to determine how much they can afford to service the mortgage each month.
“Before we start looking at properties with clients,” Bodnar says, “we go through a personal financial analysis including monthly income and expenses, such as car payments and entertainment, to determine how much is available for mortgage payments.”
A homebuyer’s income level will determine whether he or she qualifies for 95 per cent financing, and lenders look at prospective clients’ “total debt service ratio,” or TDSR, the percentage of gross family income required to cover mortgage payments and other expenses.
“The formula lenders use to arrive at this percentage is to add up the annual mortgage payments, property tax, other payments such as car and credit card payments, 50 per cent of the condominium fee and heating costs. And divide that total by gross family income,” says Feisal Panjwani, a mortgage broker at Invis Inc. in Surrey.
Prospective buyers whose TDSRs exceed 40 per cent won’t qualify for a mortgage with most lenders, although Panjwani says some individuals with exceptionally strong credit ratings may be allowed up to 44 per cent.
But do buyers who qualify for 95 per cent financing feel comfortable acquiring a debt of this size?
Homebuyers should keep well under the maximum they qualify for in order to have a buffer for emergency expenses, Panjwani says. “Interest rates will likely increase in the next few years. Most economists are expecting an increase of at least two per cent on the variable rate over the next two years.”
First-time homebuyers can use assets from their RRSPs to increase their down payment, he adds. They can also rent out space in the home, such as a basement suite, to augment income.
Still, if 40 per cent of a homeowner’s gross income is to service his mortgage, he’ll have little left over for living expenses, says Peter Veselinovich of Investors Group.
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