How Much Mortgage Debt Is Too Much?

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How Much Mortgage Debt Is Too Much?

Not sure if you’re taking on more than you can handle? Don’t want to end up house poor? Here are a few guidelines to make sure you don’t take on too much mortgage debt.

What the Banks Say

For years, Canadians have been paying more for housing costs than almost anyone in the world. That’s a little scary.

Most financial gurus recommend spending no more than 35 per cent of your gross monthly income on your housing costs. That includes mortgage, insurance, property taxes and utilities. If your new home costs you more than that, you might find yourself running out of money before the end of each month.

Total Monthly Debt Load

For most of us, our mortgage isn’t our only debt. We may also have student loans, car payments and credit card bills.

According to the CMHC, total monthly debt load shouldn’t be more than 40 per cent of your gross monthly income (or income before taxes and other deductions). Lenders include your mortgage payments in your total debt load. If your new mortgage puts you over the 40 per cent threshold, you may have trouble qualifying for that mortgage.

Relying on Your Line of Credit or Credit Cards

If you need to borrow to make ends meet every month, you’re heading for trouble. Depending on your line of credit or credit cards to live means you’re spending more than you make. Since housing is often our largest expense, it’s often the source of the problem.

You Foresee Changes at Work or at Home

Life sometimes throws us a curve ball. A job loss, a recession, starting a family, going back to school… all of these events can affect our ability to meet our mortgage payments.

If you and your partner think you may be facing major financial challenges in the near future, it’s likely not a good time to increase your housing expenses. And hurrying up to get a mortgage “while we still qualify” is especially dangerous.

Falling in Love with a Home

You know it’s out of your price range, but you’ve gone ahead and fallen in love. Unfortunately, the honeymoon will come to a crashing halt once you realize you can’t make ends meet. If your new home comes with a mortgage that forces you to give up everything else you enjoy, you won’t love it for long.

Making a Panic Buy

Some new buyers are basing their decision to enter the housing market based on fear. They fear real estate prices that just keep rising. They fear interest rates that might go up soon. They fear not being able to afford a home unless they buy it right now – even though they are not ready.

Buying a home is likely the biggest financial decision you will ever make. Buying in a panic is never a good idea. If you feel like you might be taking on too much mortgage debt, you probably are. Ignore the doom and gloom which is dished out every night on the 6 o’clock news. Meet with a mortgage professional and run your own numbers. It pays to be realistic about how much home you can afford.