Tag Archive for: Mortgage Math

Mortgage Math Revised

A few years ago I wrote a post about how you can calculate out your own debt service and figure out on your own how much house you can afford. A lot has changed since I published that in 2015, so today I wanted to update a few key components to that prior post.

Insurer’s ( CMHC, Sagen & Canada Guranty) have revised the debt service requirements ( GDS/TDS). See the prior post for the definitions. What was once the limit at 32/40 has now changed to 35/42 and up as high as 39/44. Note that these new limits are based on your credit score. If your beacon score is between 650-680 you can now qualify for 45/42 and those over 680 beacon scores can now qualify for 39/44.

Also one must not forget the fantastic qualifying rate of 5.25% that all mortgages must qualify for even though the current rates are much much less.

So here is a quick example. Say that your engineering job pays you 70K per year and you have 750 beacon score. Let’s assume for now that there are no other outside debt to make the example easy. 70,000/12=5,833.33 X .39 = 2,275. This is now your maximum mortgage payment for GDS before household expenses.

Now for TDS the process is the same but with a different ratio. 70,000/12 = 5,833.33 X.44 = 2,566.66. This is now your maximum payment for TDS before household expenses and debt payments.

To figure out what your maximum mortgage you can afford, you take the lesser of the two ratio’s which in this case is 2,275 and divide that by the the qualifying rate of 5.25 and multiple that by 1000. So 2,275/5.25 = 433.33 X 1000 = 433,333.33. This is your maximum mortgage amount.

“Pure mathematics is, in its way, the poetry of logical ideas.” Albert Einstein

Today I am thankful for the beautiful fall colours, the crispiness in the air and the feeling of euphoria after a great run.

I look forward to hearing from you in regard to your mortgage needs.

Patrick

p.s- You can click on this link to start the process whenever you are ready. Schedule your meeting with me here.

p.s.s- I should tell you that I am licensed in Nova Scotia, Ontario(M18001555) & in British Columbia(BCFSA #504098).

p.s.s.s You can download my new mortgage app here

Extra Payments

If you are one of the lucky few who’s mortgage is coming up for renewal in the next few months, this post is for you. Let’s say for example that you will have a mortgage balance of 300K at renewal and that you have been at 2.79% for the past 5 years on a 25 year amortization. Upon renewal you are offered a fixed rate of 2.09 or a variable rate of Prime ( 2.45) less 1% or 1.45.

So 5 years ago you started at 350K at 2.79% and you have paid 1,618.88 per month, you did it with no struggle and now you have an option to renew at lower rates. For example if you take the fixed at 2.09 your monthly payment on a 20 year amortization will now be 1,529.18 or 89.70 less than what you were already paying. Now if you took the variable rate your payment would drop to 1,426.52 per month with a savings of 192.36 per month.

Now since that 1,618.88 was not a hardship, I would strongly recommend keeping your payment the same. You do this by taking advantage of the lender’s pre payment privileges. So your 20 year amortization has now shrunk by almost 3 years to 17.25 years. This is the power of the extra payments as they go directly onto your mortgage principal. This was based on taking the variable rate, and note however that those rates may change. At the end of this 5 year term your new mortgage balance will be 220K. Check out the stats below. Here is the link to the calculator.

Mortgage Summary

 Over the 20-year amortization period, you will:

  • have made 207 monthly (12x per year) payments of $1,618.88 ($1,426.52 + $192.36) and one final payment of $1,397.28.
  • have paid $300,000.00 in principal, $36,504.67 in interest, for a total of $336,504.67.

 Over the 5-year term, you will:

  • have made 60 monthly (12x per year) payments of $1,618.88 ($1,426.52 + $192.36).
  • have paid $79,541.69 in principal, $17,590.89 in interest, for a total of $97,132.58.

 At the end of your 5-year term, you will:

  • have a balance of $220,458.31.

 Prepayment Savings

  • By the end of the amortization period, with your monthly (12x per year) prepayment of $192.36, you save $5,859.24 in interest and pay your mortgage off 32 months sooner than if you had the same mortgage with no prepayment.
  • By the end of the term, with your monthly (12x per year) prepayment of $192.36, you save $390.37 more in interest than if you had the same mortgage with no prepayment.

Today I am thankful for my cousin introducing me some new music, great conversations with new clients and seeing wildlife during the morning walk with my dog.

I look forward to hearing from you in regard to your mortgage needs.

Patrick

p.s- You can click on this link to start the process whenever you are ready. Schedule your meeting with me here.

p.s.s- I should tell you that I am licensed in Nova Scotia, Ontario(M18001555) & in British Columbia(BCFSA #504098).

p.s.s.s You can download my new mortgage app here