Thursday, October 18, 2012

3. Mortgage Time - The Bank said WHAT?!?

Now that you are certian you want to buy a house, its time to make sure you can afford a house.

From my last post, you may have picked up my shock that a bank would lend us $350,000 buckaroos. I wouldn't lend me that much money, why the hell would a bank?

Now, What you will be approved for, and what you can actually afford, are two, VASTLY, COMPLETELY different things.  Don't listen to the bank.

So, "Don't listen to the bank." Really? how does a 27 year old first time buyer know more than a friggin billion dollar Bank?!  Foreclosures.  So many people are losing their houses. Clearly, the banks are greedy, and want your interest money. So much so, that they know the risk of you foreclosing, but want that interest money anyway.  Its nearly killed the economy.

So, Trust me,  Do your own "pre-approval"  If you're honest and realistic with yourself and your budgeting, You shouldn't have a problem being approved for that amount.

Pro Tip: When I finally got a mortgage broker, I didn't see how much I could get, I just said "I want pre-approval for XXX amount."


Somehow, I almost forgot about this one.

As a first time Home buyer, you have the option to rape your hopefully existant RRSP's. You can take up to a maximum of 25,000 out of your RRSP's.

There are few restrictions:

  1. You must pay back 1/15th EVERY YEAR. Failure to do this will result in the tax man taking you behind a 3rd rate motel and doing unspeakable things to your taxes. (aka you'll owe a large amount of income tax you will probably not afford, as a new home owner)
  2. You have 15 years to pay this back.
  3. The money Must go to your house (really hard to prove... but generally, when you move, almost 90% of your expenses are related to your "house" 
  4. Unless your RRSP's make a great return, (aka over 6%) This could be the cheapest "loan" you will ever have. Zero interest. But it is a LOAN (even if it is technically a loan from yourself)
  5. You won't be able to lower your income with RRSP contributions when paying the minimum 1/15th a Year Back. If you pay More than the minimum, you can specify what portions go to repaying your RRSP "loan" and how much should go towards lowering your yearly income (thank you to citygirlcountryhouse for the pointer)
If you have 25 big ones in RRSP's, you probably have "a guy" (or girl) that manages all this. I found my self saying "I'll get the Down payment from my investments guy" a few times. I'm not sure if I liked the sound of it. Sometimes, I felt like it made me seem like a douche, sometimes I felt cool saying it. (random aside)

This "investments guy" is a source of information. its fairly painless to get this down payment from RRSP's if you have them. call them. Once I needed it, it took about 3 days to sell the stocks my RRSP's were in, and then I just had to big up one big ass cheque (not like the Happy Gilmour type...)

Otherwise, I recommend you have 13% of your house value in available funds. (10% down payment, 3% closing costs (Closing costs talked about in a later post)

The next part is fictional numbers, but you'll get a good idea of budgeting from it. 

So an assumption: (Yup, looks like you and I are asses) 
If you're reading this, I'm assuming you've been renting, and have a stable monthly Income/expenditure. 

We're just going to assume (that word again!) you make $5000 a month AFTER TAXES. (i'm lazy, its a nice even number, assuming two people are making roughly 40-45k a year)

Now, subtract all your Payments and monthly bills, NOT RELATED TO RENT (i.e. you're still going to need this, after you move) (assuming there's two people, 2 cars etc)
- 2X Car Payments (700)
- 2X Insurance (500)
- Debt payments (0-$600 a month)
- TV (60)
- PhoneX2 (120)
- Internet (60)
- Monthly subscriptions (Gym, Magazines, Misc.) (60)

Now, lets say you have $3000-3500 dollars left a month. Awesome!

Now, Undefined Monthly expenditures (varies from person to person)

Gas: 350
Car Repair/maint 125
Groceries 450
Entertainment: 200
Clothes/upkeep: 150

Now, you're down to 1750ish a month.

on 1750, What mortgage could I afford?

Well, Not $1750 a months worth! On a 25 year mortgage, that would be over $350,000!
When you rent, the rental company manages all the costs. Taxes, Gas, Hydro (usually) Water, Maintenance. (some better than others)

I'm finding out (still, 3 months later) that all these cost more than I anticipated. Thankfully, I didn't max myself out on the mortgage, or I'd be up the creek.

While the bank was willing to give me $350,000 I set my price limit significantly lower. I had two targets in mind, one if we could rent out the basement, and one without.

So, Take your monthly "left over" money (which is probably partially used up by rent right now) Now, take 60-70% of that. This is what I would say, is your "safe" mortgage payment.

There are a ton of other monthly expenditures every month, so you NEED a float. Cash you can save for these items.

So 65% of $1750 = $1135 a month This equates to a good sized mortgage for the first time buyer!

The remaining 600 a month is important, so don't waste it! we'll use it for utilities and maintenance and TAXES *shudder*

on a 25 year mortgage at today's variable rates, this is about $240-250,000 bucks.

Now that you have your price bracket, You have to decide WHAT you are looking for.

At this point, Add on 10%, And ask your Mortgage Broker/Bank for pre-approval for this amount. (if you were not honest with your expenses, your broker might shoot you down before it even gets to any banks/lenders)

Now, you get to the fun part. This is where things have the potential to move fast, and get crazy fun and or hectic.

You know you want to buy. And you have your price range... Now what?

Next post... (in a few days) 


  1. This is technically not true. If you took out $15,000 under HBP, you would have to pay back $1,000/year over the 15 years. If you contributed $5,000 into RRSP's during the year, you can allocate $1,000 against the HBP balance, and get the tax benefits of the remaining $4,000.

  2. Oh! Great to know!

    My "investments guy" told me that I could specify what amount I would like to indicate is my "payback" each year However, that my Employers contribution would not be eligible. (my workplace contributes even if I don't.) Do you know if this is the case?

    I need to reword this section! Thank you for commenting!