Determine What You Can Afford

Understanding What You Can Afford: A Comprehensive Guide to Purchasing Your Dream Muskoka Cottage

Are you thinking about investing in a Muskoka cottage or a home? If so, it’s crucial to understand what you can afford before diving into the exciting world of real estate. Making an informed decision will not only help you find a property that meets your needs but also ensures you don’t overstretch your financial commitments.

The Importance of Knowing What You Can Afford

Before you start dreaming about all the cozy weekends at your new cottage, it’s important to get a clear picture of what you can afford. This involves understanding both one-time costs and ongoing monthly expenses associated with purchasing a property. Awareness of these financial factors can help you make a more strategic and sustainable investment.

One-Time Costs

1. Down Payment: The largest one-time cost you will incur when buying a Muskoka property is the down payment on your mortgage. Typically, the down payment ranges from 5% to 25% of the property’s total price. For instance, if you’re eyeing a cottage that costs $600,000, your down payment could vary from $30,000 (5%) to $150,000 (25%). Deciding how much you can afford for this initial payment is essential, as a higher down payment can lead to reduced mortgage insurance costs and lower monthly payments.

2. Closing Costs: In addition to the down payment, you will encounter various closing costs that usually add an additional 1.5% to 4% of the property’s purchase price. These can include legal fees, title insurance, home inspections, and appraisal fees. Budgeting for these costs ensures there are no surprises when you’re ready to finalize your purchase.

3. Moving Expenses: Don’t forget to factor in the costs associated with moving. Whether you hire professionals or do it yourself, expenses can add up quickly. This is another essential aspect of understanding what you can afford.

Monthly Expenses

Understanding what you can afford isn’t limited to just one-time costs; ongoing monthly expenses are equally important to consider.

1. Mortgage Payments: Each month, you will need to make mortgage payments that comprise both principal and interest. The amount you can afford in monthly payments will depend on various factors, including your income, the interest rate, and your down payment. It’s wise to consult with a mortgage specialist who can help you determine the best mortgage options based on your budget.

2. Property Taxes: As a property owner, you’ll be required to pay property taxes, which can vary greatly in Muskoka depending on the municipality and the assessed value of your property. Factor these costs into your monthly budget as they can impact your overall affordability.

3. Utilities and Maintenance: Owning a cottage or home includes ongoing utility costs such as electricity, water, heating, and possibly internet service. Additionally, you’ll want to budget for regular maintenance expenses, which can include everything from seasonal upkeep and repairs to landscaping and cleaning.

4. Insurance: Homeowners insurance protects your investment, and you’ll want to ensure you have adequate coverage for both property damage and liability. Insurance costs can vary depending on the location and specifics of your property, but it’s an expense you cannot overlook when determining what you can afford.

Seeking Professional Help

Navigating the complexities of real estate can be daunting. Engaging a knowledgeable real estate agent who specializes in Muskoka properties can provide invaluable insights and help you identify homes that match your budget and lifestyle. Additionally, working with a financial advisor or mortgage broker will allow you to better analyze your financial situation and identify your purchasing power. We have worked with some great financial professionals who we would be happy to recommend. Reach out to our team for more info.

In summary, understanding what you can afford when purchasing a Muskoka cottage or home involves careful consideration of one-time costs as well as ongoing monthly expenses. By taking the time to fully comprehend your financial landscape and working with trusted professionals, you can make a well-informed decision that aligns with your financial capabilities. Whether you envision a relaxing weekend retreat or a permanent home filled with cherished memories, knowing what you can afford will set you on the path to making that dream a reality. Start your journey today and secure your piece of Muskoka paradise!

TYPICAL ONE-TIME EXPENSES

EXPENSE	WHEN TO BE PAID
Mortgage Application and Appraisal Fee	At time of offer
Property Inspection (optional)	At Inspection
Legal Fees	At closing
Legal Disbursements	At closing
Property Survey (sometimes provided by seller)	At closing
Land Transfer, Deed Tax or Property Purchase Tax	At closing
Mortgage Interest Adjustment and Take Over Fee (if applicable)	At closing
Mortgage insurance (if applicable)	At closing
Home and Property Insurance	At closing and on going
Moving Expenses	On date of move

Typical monthly costs incurred with home ownership are mortgage payments, maintenance, insurance, condo fees, property taxes and utilities. See the “What You Can Afford” Worksheet to help you estimate the purchase price of a home you can afford.

“WHAT YOU CAN AFFORD” WORKSHEET

STEP 1 - CALCULATE YOUR GROSS DEBT SERVICE RATIO (GDS)

Most lenders say that your monthly housing expenses (principal, interest and taxes) should not exceed 30% of your family income (before personal income taxes).

To calculate your Gross Debt Service Ratio (GDS):

Take your total monthly gross (before tax) income	$__________________
Multiply it by the maximum GDS Ratio (30%). x .30	$__________________
This is the maximum amount available for your mortgage payment (principal and interest), property taxes and 50% of condo fees (if applicable)	= $__________________

Example: Ben and Kate have a gross family income of $80,000 per year, or $6,700 per month. No more than $2000 ($6,700 x 30%) can be applied to housing expenses.

STEP 2 - CALCULATE YOUR TOTAL DEBT SERVICE RATIO (TDS)

Your TDS takes into account monthly housing expenses plus other debts and loans you may have.

To calculate your Total Debt Service Ratio (TDS):

Take your monthly gross (before tax) income	$__________________
Multiply it by the maximum TDS ratio (40%) x .40	$__________________
Subtract your regular monthly expenses (e.g. credit cards, car payments, personal loans)	– $__________________
This is the maximum amount available for your mortgage payment, property taxes and 50% of condo fees (if applicable)	= $__________________

Example: Ben and Kate have a gross family income of $80,000 per year, or $6,700 per month. They also have two car payments totalling $650 per month, a student loan of $100 per month, and credit card payments of $100 per month. They can apply no more than $1,830 of their monthly income to housing costs ($6,700 x 40% = $2,680 – $850 = $1,830).

STEP 3 - CALCULATE THE AMOUNT AVAILABLE TO APPLY TO YOUR MONTHLY MORTGAGE PAYMENT

This figure will be used to calculate how much mortgage you are eligible for.

To calculate this amount:

Identify the lower of your GDS or TDS	$__________________
Subtract an appropriate amount for property tax	– $__________________
This is the amount we will now use to calculate how much mortgage you are eligible for	= $__________________

Using the example of Ben and Kate, their TDS ($1,830) is lower than their GDS ($2,000) and they estimate their property taxes will be $200 per month. They have $1,630 available to apply to their monthly mortgage payment. (i.e. $1,830 – $200 = $1,630)

STEP 4 - DETERMINE THE PURCHASE PRICE YOU CAN AFFORD

· Using the figure calculated in Step 3, find the closest matching number in column A.

· The corresponding number in column B is your approximate eligible mortgage amount.

· In column C record the down payment amount that you have available.

· In column D add the numbers identified in columns B and C together.

This equals approximately the price of the home that you can afford. In the example of Ben and Kate, the amount calculated in Step 3 was $1,630. They also have saved a down payment of $30,000. With a monthly payment of $1,630 (refer to column A) they are eligible for an approximate mortgage of $130,000 (refer to column B). With their down payment of $30,000, they can afford to buy a home worth approximately $160,000.

A	B
Monthly Payment	Eligible Amount of Mortgage

(cost includes principle and interest payment per month based on interest rate of 6.75% and 25 year amortization)

$686	$100,000
$823	$120,000
$960	$140,000
$1,097	$160,000
$1,234	$180,000
$1,371	$200,000
$1,713	$250,000
$2,056	$300,000
$2,398	$350,000
$2,741	$400,000
$3,083	$450,000
$3,426	$500,000
$3,768	$550,000
$4,111	$600,000
$4,453	$650,000
$4,796	$700,000
$5,138	$750,000
$5,481	$800,000

C	D
Down Payment Available	House Price You Can Afford
+ ________________	= ________________

Don’t forget that the down payment must be at least 20% of the purchase price of the home, unless you qualify for Canadian Mortgage and Housing Corporation’s (CMHC) 5% down payment program.

Here’s a link to the General Requirements for CMHC.

Please note that all amounts are approximate. Columns A & B are based on an interest rate of 6.75%. Rates do vary. If rates are higher, you would be eligible for a smaller mortgage. If rates are lower, your mortgage could be higher.

These calculations do not take into account mortgage insurance premiums for high-ratio mortgages.

We can keep you informed of current rates and refer you to a Mortgage Specialist who will help you decide the financing terms and options that are right for you so that you know what you can afford. Contact us today!