5.2.12 Case study: Mortgage costs

Kemal and Andrea have decided that they need a larger home. They have budgeted their income and expenses, and with their combined incomes they think they can afford payments up to $2,000 a month—enough for a comfortable home for their growing family. But they are not sure what a financial institution will lend them. Kemal suggests that they start with the Mortgage Qualifier Tool from the Financial Consumer Agency of Canada (FCAC).

• They have $25,000 saved for a down payment and expect to pay mortgage interest of 4.5 percent with a 25-year amortization period for a five-year term.
• Kemal's annual income (before deductions) of $45,000 and Andrea's $55,000 give them an annual income of $100,000 a year.
• They expect their monthly property taxes will be about $250 a month, and their heating costs will be about $350 a month.
• Their only debt is a car payment of $500 a month.

The calculator says that a financial institution would lend them enough for a home priced at $350,000, with their $25,000 down payment and monthly mortgage payments of $1,871. (This includes the cost of mortgage default insurance, added to their payment, because their down payment is less than 20 percent of the house's value.)

"Great. With this information, we'll know how much we could borrow if we need to," Andrea says. Kemal adds, "And our budget tells us the maximum payments we can afford for a new home."

Of course, Kemal and Andrea should aim to spend less than the maximum the calculator shows to give them some flexibility if their finances change. (You will see more about Kemal and Andrea in the next section.)

FCAC's Mortgage Qualifier Tool helps you get an idea of the amount you could finance, based on formulas that lenders use to evaluate loans. Together with your income and expenses budget, it can give you a realistic sense of your ability to pay for a mortgage. When you buy a home, you also have to be ready for a variety of additional expenses and taxes. For more information, see the section titled Total costs of a mortgage.

You can estimate the amount of a mortgage you could qualify for with the FCAC's Mortgage Qualifier Tool. Enter the information for a mortgage you'd like to take out. Compare the possible options by choosing different selections from those given and decide which would best suit your needs.