January 29, 2015 10:37 am
Updated: January 29, 2015 12:31 pm

Mortgage rates are dropping — so how much house can you handle?

The government has moved several times in recent years to tighten mortgage lending rules, including reducing the maximum amortization period for insured mortgages as well as making changes to the qualifying rules.

The Canadian Press
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Major banks like RBC have finally lowered interest rates on home loans in tandem with the Bank of Canada’s rate cut made last week.

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Big lenders have begun offering fixed-rate mortgages at rock-bottom rates of as little as 2.84 per cent, while smaller lenders can be found providing fixed-rate loans at as low as 2.69 per cent.

Meanwhile home loans with variable rates – i.e. with an interest rate that’s not set but instead floats up and down – have edged below 2 per cent.

The renewed mortgage rate wars sparked by the Bank of Canada’s surprise cut are sure to draw out house hunters in the weeks and months ahead. But can you afford that mortgage, even at the current ultra-low levels of interest?

Rule of thumb

The historical rule of thumb among mortgage experts is that no more than about 32 percent of household pre-tax income should be spent on housing costs, like your mortgage, utilities, condo fees and property taxes.

A record boom in housing prices however has thrown that threshold out the window for more than a few Canadian households. Royal Bank of Canada suggests the average family who owns a home dedicates 42.6 per cent of their income to covering the mortgage, utilities, property taxes as well as fees for condominium owners.

In some centres – notably Vancouver (83.6 per cent) and Toronto (56.3 per cent) – the percentage is far higher.

How much house can you handle? Use this calculator to find out.

For condo owners, simply lump monthly fees into property taxes. (And to determine your potential monthly payment, use RBC’s mortgage calculator)
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