Before you sign on the dotted line to take on the responsibility of a mortgage, it is vital that you understand the sort of financial burden you are undertaking. Unless you are in the market for a Bugati or other luxury sports vehicle, the loan you take out for a house is likely to be the biggest you ever take out. When you are figuring out whether or not you can afford a particular loan, it’s fastest with a mortgage calculator. Canada has a number of banks, brokerages and alternative lending firms that offer online calculators like the one at /calculators/ which you can use to figure out how much you will be paying.
Here are the basics of how mortgage payment calculation works. Start by figuring out what your loan will be. If you are purchasing a home for $600,000, and you are putting 20 percent down ($120,000), your mortgage will be $480,000. Next, you need you interest rate, amortization period and frequency of payment in order to find out how much you will pay each month. If you had paid less than 20 percent down, you would also have mortgage premium insurance through CMHC or another provider to calculate. For the purposes of this example, let’s assume a fixed rate, ten-year loan that amortizes over a 25-year period, with monthly payments. Each month, you would owe $2,656.68.
But what if you paid biweekly? That’s not quite the same, as some months have, say, five Fridays in them. This actually means you’re paying 26 biweekly payments instead of 12 monthly payments, in effect making an extra month’s worth of payments. With all of the other numbers the same, you would pay $1,226.16 every two weeks. You would pay off the loan sooner, and you would save $3,724.84 in interest over the 25 years (assuming the interest rate stays the same the whole way). What some lenders refer to as an “accelerated bi-weekly” plan ramps up your payments even more. If you bumped up those biweekly payments even $100 more, you could really start to save. Bi-weekly payments of $1,328.34 would end up paying off the note more than three years before full amortization, saving you almost $50,000 in interest.
Now that you know what your payment options are, it’s time to figure out if this loan is going to work with your financial situation. Traditional lenders ask for a lot of detailed information regarding your finances, in order to determine whether or not you can handle the loan. They use two different ratios to determine whether you qualify, known as the front end and back end ratios.
To calculate front end ratio, you add up the principal, interest, taxes and heating costs for your home (known as PITH). Also add in any homeowner’s association dues. Then, divide this number by your gross monthly income. If you get a number larger than 0.28, then you are going to have a tougher time with your bank. A 28 percent front end ratio is the recommended maximum for a number of lenders.
The back end ratio takes into account your other debts as well. You don’t add in other utilities, but you do add in things like credit card payments and car notes before dividing by your gross income. This number should not be higher than 0.36 unless you have an exceptional credit score and several months of savings in the bank. If you have enough socked away, you can push this ratio up to 50 percent, but it takes significant savings. The lenders want to make sure that you have the wherewithal to pay your loan off each month, as foreclosure is a process that no lender wants to go through.
Now that you know your likely monthly payment (or bi-weekly, if you choose a more accelerated method), it’s time to start talking to a lender about getting your financing. Amansad Financial has contacts at a number of traditional, private and alternative lending sources throughout western Canada, and we have helped many clients secure the funding they need for the home that they want. If you have more than 20 percent to put down but can’t get bank approval because of issues with your credit score or income history, we can help you find private lending sources to get you into your home. Give one of our professionals a call today!