When a client comes into the office looking to buy a new home, we send them off to the mortgage broker to see how much home they can afford. The broker will crunch some numbers and help them to define an “affordable house payment.”
But what is an affordable house payment?
According to CMHC (Canada Mortgage and Housing Corporation), your monthly housing costs should not exceed 32% of your gross monthly income. Your housing costs include monthly mortgage payments, taxes and heating expenses (and half of the condo fee, if necessary). Along with that , your entire monthly debt load should not be more than 40% of your gross monthly income. This includes all your housing costs, and other debts like car payments, personal loans, and credit card payments.
The trouble with these guidelines is that they fail to take into consideration other factors. For example, a couple with 4 children is probably going to be able to afford less house than a young couple with no children.
Let’s look at a specific example.
Suppose a family of four is pulling in about $6,000 per month. That’s $72,000 annually. We will assume that they are otherwise debt-free, just to make things easier. According to the DTI (debt-to-income) ratio of 32%, the couple should be able to afford a monthly house payment of $1920. That leaves $4080 per month to cover everything else.
Before I encourage them to purchase a $250,000 plus house, let’s take a look at their current monthly budget. Here is where the rest of the money might go:
Income taxes (30% very conservatively) $1800
Kid’s activities (hockey, soccer, dance) $400
Car insurance $180
Gas (for the cars) $200
Car maintenance and repairs $200
Movies, TV, internet $120
Cell phone, telephones $200
Clothing, shoes $50
Dining out $150
Personal care (hair cuts, sundries) $70
Pet care $50
Now, you wouldn’t exactly say that this family was living high on the hog, yet if the house payment was $1920 per month, they would be seriously struggling every month to make ends meet.
What can you learn from this?
That guidelines are just that. You need to talk to a professional about how much house you can afford based on your budget and projections and develop a realistic affordable payment plan. Every situation is unique.
I can tailor your house payment to fit your budget, not the other way around.