"Unlock Your Dream Home: How Much Income You Need for a $600K Mortgage at Today's Rates"
Deciding between a fixed or variable mortgage rate is crucial, especially with rates at 4.69% for fixed and 5.75% for variable. For a $600,000 home, understanding your monthly payments and required income can save you stress and money. This guide breaks down both scenarios' costs and income requirements, helping you make an informed choice.
Why This Decision Matters
Making the right decision about your mortgage interest rate can save you money.
Understanding Fixed vs. Variable Rates
Fixed Rates: These are based on bond market performance and remain the same for the term of your mortgage.
Variable Rates: These are based on the prime rate announced by the Bank of Canada, which can change, causing your monthly payments to fluctuate.
Live Example for a home 600 K with minimum downpayment!
Let's calculate the monthly mortgage payments and the required gross annual income for both fixed and variable rate scenarios for a $600,000 home with a 25-year amortization period, considering:
• Fixed rate: 4.69% for 5 years
• Variable rate: 5.75% for 5 years
Down Payment Calculation
In Canada, the minimum down payment required for a home depends on the purchase price:
• For homes up to $500,000, the minimum down payment is 5%.
• For the portion of the home price above $500,000, the minimum down payment is 10%.
For a $600,000 home:
• First $500,000: $25,000
• Remaining $100,000: $10,000
• Total minimum down payment: $35,000
CMHC Insurance
When you have less than a 20% down payment, you must pay for mortgage insurance provided by the Canada Mortgage and Housing Corporation (CMHC). The insurance premium is calculated as a percentage of the loan amount and is added to your mortgage.
The mortgage insurance premium rate is 4% for a $600,000 home with a minimum down payment of $35,000.
• Mortgage amount without insurance: $600,000 - $35,000 = $565,000
• CMHC insurance premium: $565,000 × 4% = $22,600
• Total mortgage amount with CMHC insurance: $565,000 + $22,600 = $587,600
Monthly Mortgage Payments
1. Fixed Rate at 4.69%:
o Monthly payment: Approximately $3,341.04
2. Variable Rate at 5.75%:
o Monthly payment: Approximately $3,670.39
Gross Income Needed
We use the Gross Debt Service (GDS) ratio to determine the gross income needed, which should not exceed 32% of your gross income. The GDS ratio includes mortgage payments, property taxes, heating costs, and 50% of condominium fees (if applicable).
Assuming property taxes and heating costs add up to $500 per month:
1. Fixed Rate Scenario:
o Monthly housing costs = $3,341.04 (mortgage) + $500 (taxes and heating) = $3,841.04
o Annual housing costs = $3,841.04 × 12 = $46,092.48
o Minimum gross annual income needed = $46,092.48 / 0.32 ≈ $144,039
2. Variable Rate Scenario:
o Monthly housing costs = $3,670.39 (mortgage) + $500 (taxes and heating) = $4,170.39
o Annual housing costs = $4,170.39 × 12 = $50,044.68
o Minimum gross annual income needed = $50,044.68 / 0.32 ≈ $156,390
Stress Test Requirement
You must pass the mortgage stress test to qualify for these mortgage rates. This means you must qualify at an interest rate 2% higher than your mortgage rate.
• For a fixed rate of 4.69%, you need to qualify at 6.69%.
• For a variable rate of 5.75%, you need to qualify at 7.75%.
Summary
• Fixed Rate (4.69%):
o Down payment: $35,000
o Total mortgage amount with CMHC insurance: $587,600
o Monthly mortgage payment: $3,341.04
o Minimum gross annual income needed: $144,039
• Variable Rate (5.75%):
o Down payment: $35,000
o Total mortgage amount with CMHC insurance: $587,600
o Monthly mortgage payment: $3,670.39
o Minimum gross annual income needed: $156,390
Making an informed decision between fixed and variable rates is crucial. Consider your financial goals, market trends, and potential penalties. Making the right choice can save you money and reduce stress.
Are you ready to buy a home? Find out how much you can afford and take the first step to discuss your mortgage options. Contact us today at 647.493.3579 or book an appointment at www.calendly.com/tony-ledi to schedule your free consultation.
Let's make sure you choose the best option for your future!
Stay tuned for our next article on Refinancing Your Mortgage Scenario.
