Introduction

There has been a lot of discussion in the media lately concerning the lowering of interest rates by financial institutions. It is felt by many that lowering the interest rates will make purchasing a home more attractive. If you are thinking of buying a home you probably have many great ideas about what you would like - several thousand square meters of living space, a two-car garage, a large lot with a white picket fence, one or two fireplaces, and a panoramic view.

But it may be time for a reality check. Most people are concerned that they have a job and an income. Current business and government policy that advocates down-sizing means that large numbers of people are out of work. This hardly seems a strategy that gives people the confidence they need to agree to finance a purchase that is structured to take twenty-five years to pay off. Purchasing a home is usually the largest single purchase that any of us is likely to make.

On the other hand, real estate prices are much lower than they were in 1990. In general, real estate prices have tended to remain quite steady for the past few years. This means that values can be compared and checked so that you can have confidence that you are receiving what you think you are purchasing. It also gives individuals the opportunity to take advantage of favourable purchase prices.

For most of us the reality of job and financial uncertainty makes us hesitant to take advantage of lower real estate values and prices. The best way to deal with this reality is with careful planning so that you match your financial capabilities with the home that meets as many of your needs as possible. For example, many first-time buyers purchase what is commonly known as a "starter" home. There's nothing wrong with this approach. In fact, it's good common sense to avoid buying a home that will stretch your budget to its breaking point. Remember that the starter home is just that, a way to get started in long-term real estate investment.

• Don't overstretch your budget.

Taking a Mortgage

Most home buyers lack the funds required to buy a home without assistance from a bank or other financial institution. A loan secured by a charge on real property is called a mortgage. For most people, buying a home means combining savings with money borrowed through a mortgage. The best way of finding a mortgage lender suitable to your needs is simply to go from institution to institution and ask them what their policies and requirements are.

The typical costs in buying a property:

There are two types of costs to be considered when buying a home:

1. the amount of money you will need for the initial purchase, consisting mainly of the down payment as well as other costs, such as legal fees, other fees and land transfer tax. In addition to the down payment, you will need approximately three thousand dollars ($3,000.00) in ready cash to purchase a $200,000.00 home;
   
2. the ongoing costs of paying back your mortgage, along with monthly costs of operating your home for utilities, maintenance, insurance and annual property taxes in addition to your personal needs.

When institutional lenders assess your ability to buy, they look at your ability to pay both types of costs in determining how much money they will lend you. They use several factors in judging your ability to handle a mortgage, including your income, employment record and credit worthiness. However, one way you can estimate the price range you can afford is to look at the amount of money you have available for a down payment.

• Work out how much down-payment your can afford.
  
• Work out your net monthly income
  
• You can then work out the price range you can afford.

Conventional Mortgage

The most common mortgage is a "conventional" mortgage. In this type of mortgage arrangement, lenders will loan up to 75 percent of the "appraised" value (estimated market value) of the property or the purchase price, whichever is lower. The remaining 25 per cent is the amount you will have to contribute as a down payment.

How to calculate what you need:

If you want to buy a home that has an appraised value of $200,000 a lender may loan you 75 per cent or $150,000 on a conventional mortgage when you contribute a down payment of $50,000.

If you plan to borrow funds through a conventional mortgage, multiply the money you have available for a down payment by four. For instance, if you have access to $40,000, you may be able to purchase a home with an appraised value of $160,000 ($40,000 x 4 = $160,000). This assumes, of course, that you have sufficient income to make the payments on a $120,000 mortgage (75 per cent of $160,000) of approximately $1,000.00 per month.

Gross Debt Service and Total Debt Service ratio

Most lenders will not permit a borrower to take on a debt load the borrower can't carry. That's why reputable lenders "qualify" potential borrowers before issuing mortgages. Most lenders say your monthly operating expenses should not exceed 30 per cent of your gross family income. This is called your Gross Debt Service (GDS) ratio. Some lenders will go as high as 35 per cent GDS, depending upon a number of variables.

Lenders also use a second calculation in qualifying you for a mortgage. It's called the Total Debt Service (TDS) ratio. Generally speaking, no more than 40 per cent of your gross family income may be used when calculating the amount you can afford to pay for mortgage payments and taxes, plus your other fixed monthly expenses.

After going through the exercise outlined above, if you should find that your Gross Debt Service ratio would be below 30% of your gross family income, but you have no cash available to make a down payment or finance the remaining 25% of the home purchase, you might be able to borrow the cash by arranging a personal line of credit with your bank. However, this form of financing should be viewed only as short-term financing, whereas a mortgage may be viewed as long-term financing.

Buying a home can be one of life's most rewarding and exciting adventures or it can be a nightmare depending on the amount of planning and preparation you do. If you have questions concerning purchasing a home, you should consult a real estate lawyer before you sign the Agreement of Purchase and Sale. Remember, if you sign an Offer to Purchase it becomes a binding Agreement of Purchase and Sale when it has been accepted by the Vendor. Most real estate lawyers will be happy to answer your questions and help make buying a home a pleasant experience. I look forward to hearing from you.