# Crazy mortgage amounts?



## tinypotato (Jul 27, 2010)

Not exactly sure where this topic goes....but what's everyone's definition of a "crazy" mortgage amount (not the monthly payment, but the opening balance)?

Would it be 2X gross annual income (so for an annual income of $150K....taking a max mortgage of $300K)?

3X? 4X?

Just seems that where I am (Vancouver), the amounts needed for a family to get into a reasonable home is nuts.

I'm looking at about 2X gross income, on a property where I'm putting over 50% down...but that's still scary to me...

Not sure how others feel, and if I'm being a bit paranoid...


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## MRT (Apr 8, 2013)

I think you're being paranoid (which isn't a bad thing). Assuming the rest of your financial house is in order (and I suspect it is rather tidy, if you are putting 50% down), you are WELL below what most buyers are prepared to take on, and what the bank would lend you. I assume you are leaving yourself in a good position to more quickly pay it off, at 2x gross income.

Crazy = approaching the highest amount the bank will lend you. Too many people think that because they qualify for a particular amount, that it is a good idea to take it.


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## the-royal-mail (Dec 11, 2009)

I think the formula the bank uses has a target of something like 40%...can't remember the name or how it works but someone will know.

I agree that the amount they approve for is pretty high. 2X gross income is easy, when you start going to 3X and greater that's when the pressure is getting high for my liking.

Spend some time messing around with mortgage calculators and see the difference in interest paid when rates rise. It's huge. Current govt policy is to inflate prices to the insane ones we have now but keep rates low. This has suckered in a lot of people. (God help us all if the housing market should ever crash in some form. It could happen. Look at US.)

But again, go by the bank formula, not by this 2X or 3X thing you're asking about.


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## Just a Guy (Mar 27, 2012)

Historical average was 2.5x annual income. That used to be the bank limit, so that was pretty stable for generations. Today you can get much higher, which has lead to a real estate bubble.


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## birdman (Feb 12, 2013)

Sorry that I can't answer your question but in 1971 at the age of 25 yrs we bought a house in Vancouver in the Dunbar area for $18,500. and I was making $5500. per annum and my wife was around 3500. PA. Sold it at a profit after a couple of years and purchased a home in the Little Mtn area for $23,500. which we sold 9 yrs later for $140,000. and moved to the Okanagan.
Those were the easy days!


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## nathan79 (Feb 21, 2011)

Above 3X is commonly considered the threshold for unaffordable.


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## NotMe (Jan 10, 2011)

nathan79 said:


> Above 3X is commonly considered the threshold for unaffordable.



Agreed 3x income is historical threshold. Personally I think it varies a bit according to individual circumstances or city. For instance, if I worked in a town that was supported mostly by one company or industry, I'd be more scared than if I worked in a major city where finding another job of equal pay would be relatively easy.


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## wendi1 (Oct 2, 2013)

My house was just under 3% of my annual income when we bought. But that was my salary alone (hubby was temporarily unemployed), so I was pretty sure we could cover the mortgage under most circumstances.

Everyone feels a little bit afraid when they make the biggest purchase of their life. You have to get as many facts as you can, then decide using the logical part of your brain (ignoring the reptile part which hates change).

Good luck!


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## phrenk (Mar 14, 2011)

tinypotato said:


> Not exactly sure where this topic goes....but what's everyone's definition of a "crazy" mortgage amount (not the monthly payment, but the opening balance)?
> 
> Would it be 2X gross annual income (so for an annual income of $150K....taking a max mortgage of $300K)?
> 
> ...


The real metric to look at is whether you are able service the mortgage loan payments with your cash flow after all expenses (pre mortgage). 

Using a multiple on gross income does not take into consideration different lifestyle choices (such as owning loan free your mercedes or paying $800 / month on your mercedes). 

You need to get comfortable on whether you are able to paydown the loan monthly, and the only way to do that is to look at your monthly income, less all expenses and monthly loan payment. You should adequate net cash flow left for discretionary items / expenses and savings.


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## jcgd (Oct 30, 2011)

frase said:


> Sorry that I can't answer your question but in 1971 at the age of 25 yrs we bought a house in Vancouver in the Dunbar area for $18,500. and I was making $5500. per annum and my wife was around 3500. PA. Sold it at a profit after a couple of years and purchased a home in the Little Mtn area for $23,500. which we sold 9 yrs later for $140,000. and moved to the Okanagan.
> Those were the easy days!


So you paid 3.36x for your first house. Not bad.


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## Sherlock (Apr 18, 2010)

> I'm looking at about 2X gross income, on a property where I'm putting over 50% down...but that's still scary to me...


Why is that scary? Are you anticipating a job loss in the near future?

I was at the bank a few weeks ago and sat down to talk to the mortgage lady just to see how much I could borrow, and got a verbal pre-approval for just under 6x my gross annual income with a 25 year amortization. I assume a mortgage broker could do even better than that. I personally would never borrow that much but many other people would not hesitate. I think that during the 0 down 40 year era a few years ago, people were getting approved for much higher amounts than this.


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## peterk (May 16, 2010)

If I buy a house in Fort McMurray I'll be needing to take on about 5x income for the mortgage, and that's with a full 20% down! Kinda scary...


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## Four Pillars (Apr 5, 2009)

Historical price to income ratios aren't really all that relevant, since interest rates are lower now.

That said, one approach is to focus on the mortgage payment + other costs and determine how much of your budget you are willing to allocate. As far as risk assessment, try plugging in higher interest rates and verify that you can cut enough non-essentials to pay for the increased costs.


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## HaroldCrump (Jun 10, 2009)

Not directed to anyone in particular, but here is a general question - is anyone calculating the _total_ price paid for a house once the mortgage is fully paid off, and then figuring out what x multiple it is of their disposable income?

So, if you just bought for a 15% down payment (example), and a 25 yr. amortization with a 5 yr. fixed rate of say 3.65%.
What is the total cost at the end of 25 years?
To be realistic, calculate the total cost with some sort of interest rate escalation such as a 1% increase every 5 years.

Then figure out what multiple of your average 25 year disposable income it will be.

That tells you how much disposable income your house ends up costing you.


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## the-royal-mail (Dec 11, 2009)

A 30 year, 3% mortgage of $640,000 has a monthly payment of $2691.86, ends up costing the individual(s) over $969,000, over *$329,000* of which is just interest.

Urban housing costs are completely insane right now and salaries are not coming anywhere close to keeping up. If I had $329K to burn I certainly wouldn't be doing it via interest payments to the bank.


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## CPA Candidate (Dec 15, 2013)

Four Pillars said:


> Historical price to income ratios aren't really all that relevant, since interest rates are lower now.


Thank you! Now someone please tell Rob Carrick as he makes these kind of apples to oranges comparisons all the time as proof that the market is in a bubble.


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## andrewf (Mar 1, 2010)

Banking on the Japan scenario of perpetually low interest rates seems a little reckless to me. If interest rates rise, the value of housing falls but the debt remains.


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## Feruk (Aug 15, 2012)

Four Pillars said:


> Historical price to income ratios aren't really all that relevant, since interest rates are lower now.


That's a very short sighted attitude.


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## RBull (Jan 20, 2013)

The lenders have their standards and everyone also has their own tolerance level which may be lower, at, or even above what they could secure. 

I owned 2 homes I had mortgages on. They were both approx 1x household income (1st one just me, and 2nd one four years later with my wife) when they were first secured. We paid off that in less than 6 years. Even at the 9% rate or so we paid it wasn't a lot in interest. Obviously our comfort level with debt is much less than most. I can't imagine living somewhere like Vancouver and trying to buy a home.


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## nobleea (Oct 11, 2013)

People generally refer to the price to income ratios, but I would think debt to income is more appropriate.

Example A
Family making 200K/yr buys a 650K house with 50K down.

Example B
Family making 40K/yr buys a 650K home with 600K down.

Price to income says family B is crazy and out to lunch, but they're in a much better position than family A. I'm sure it's a good weathervane for macroeconomic trends, but I think it fails at the individual level.


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## My Own Advisor (Sep 24, 2012)

Uh, family b is a in a great position 

FWIW, we're paying close to $100,000 interest on our house to amortization. Crazy when you think about it. More people need to think of borrowing in terms of sums paid to someone else. 

8 more years to go to slay the dragon....


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## Four Pillars (Apr 5, 2009)

nobleea said:


> People generally refer to the price to income ratios, but I would think debt to income is more appropriate.
> 
> Example A
> Family making 200K/yr buys a 650K house with 50K down.
> ...


Absolutely. You won't be able to convince some of the crazies in here about this, but the fact is that a lot of people who buy houses have a lot of equity from their previous house which changes the scenario a lot (as your example shows).


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## heyjude (May 16, 2009)

Four Pillars said:


> Absolutely. You won't be able to convince some of the crazies in here about this, but the fact is that a lot of people who buy houses have a lot of equity from their previous house which changes the scenario a lot (as your example shows).


Which is another reason why it's a good idea to sell your old home before you buy the new one. Cash in hand is powerful. I have neighbours who bought first at the peak of the market and then found it difficult to sell as the market dropped. They lost $200k in the transaction.


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## nobleea (Oct 11, 2013)

My Own Advisor said:


> FWIW, we're paying close to $100,000 interest on our house to amortization. Crazy when you think about it. More people need to think of borrowing in terms of sums paid to someone else.
> 
> 8 more years to go to slay the dragon....


Just did the math, we're going to pay just over $16K in interest til it's paid off. It's an average sized mortgage, but we're paying it off in 5 years.


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## sags (May 15, 2010)

The report yesterday said that house prices have gone up 10% in Canada over the past year. Even taking Vancouver and Toronto out of the equation, home prices still rose almost 5%.

Inflation for the year was at a much lower level than that............and wage increases were nowhere near the level of home price increases.

Either homes became less "affordable" than they were 1 year ago..............or somebody is playing with the numbers.


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## HaroldCrump (Jun 10, 2009)

sags said:


> Inflation for the year was at a much lower level than that............and wage increases were nowhere near the level of home price increases.


It is easy to calculate inflation...by leaving out those items whose prices are going up.
Leave out housing, hydro, gasoline, etc.
Just count those items whose prices are stagnant or falling, like junk electronics, clothing, furniture, etc.
It's simple.

As for affordability, literally no one cares any more.
Entrants into the home buying market (esp. metro Vancouver, GTA, and a couple of other hot spots) are like those drunkards that stopped counting after their 5th drink.


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## Just a Guy (Mar 27, 2012)

By definition, inflation cannot be lower than the rising costs of goods (despite what the government wants you to believe). If the things you need (food, shelter, clothing, fuel) are increasing in cost, then it costs more to live and you are living in inflationary times...even if the price of purple and green bottles (or whatever stupid product the government uses to cook the books) hasn't risen lately.


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## My Own Advisor (Sep 24, 2012)

nobleea said:


> Just did the math, we're going to pay just over $16K in interest til it's paid off. It's an average sized mortgage, but we're paying it off in 5 years.


Great work.


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