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Mortgages
What is the maximum mortgage I can obtain?
If we are looking to buy a home but need to apply for a mortgage, one of the first questions we need to ask ourselves is how much we will be able to borrow from the bank.
But before knowing the answer to that question, there is another much more important question that we must ask ourselves:
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How much money can we afford to spend on buying a home?
To answer that question we need to calculate our maximum budget for buying a home. This will help us:
- Set a maximum price for ourselves when house-hunting.
- Ensure that the bank says yes to our mortgage application.
To calculate our budget for buying a home, we need to know our total annual net income (or our combined household income if we are planning to buy a property as a couple). We should then divide it by 12, to obtain our average monthly income.
Of this figure, 35% will be the money we can afford to spend monthly on the purchase of a home, making it our maximum monthly budget. This amount is also known as debt capacity, because it determines the maximum amount of money we can spend to pay off our debts. And this is one of the main points that banks rely on when deciding whether to grant us a mortgage loan for the amount we are seeking.
What is the maximum mortgage amount that a bank can offer me?
Once we have worked out our budget, we need to find out the maximum mortgage amount that a bank will be willing to offer. Banks take different variables into account when analysing and determining this amount:
- The valuation or appraisal of the property we are looking to acquire, which is an estimate of the property's value based on pre-defined criteria. This estimate is made by an appraiser and is there to ensure that the market value reasonably reflects the purchase/sale price for the same property.
- The use of the mortgage, which means knowing the purpose or use of the object to be mortgaged. Banks need to know whether the property will be our primary residence, a second home, or perhaps put to some other use.
- The purchase price, meaning the price agreed upon between the seller and the buyer.
- The customer's payment capacity, which is based on the difference between income and expenses and essentially establishes how much debt we can incur.
Although banks appraise each application separately, they will not generally lend more than 80% of the value of a home if we are looking to buy a primary residence, and 60% for second homes. In both cases, this percentage would be applied to either the appraisal value or the purchase price, whichever is lower.
When applying for a mortgage, it is strongly recommended to have sufficient savings to cover roughly 30% of the value of the home. This initial capital will be enough for us to meet all transaction expenses (notary fees, taxes, etc.) and also pay the part of the price that is not being financed by the bank.