This post is a paid collaboration with BMO, but all opinions are my own.
It’s been over a year since we legally bought our house (the part where we signed the papers and fulfilled all of our conditions) and almost a year since we moved, so I’m feeling a little nostalgic—and also amazed at how much has changed.
If you’re looking at buying a house this year, there’s a lot that I would do the same.
- I’d still read up on all of the closing costs we needed to know about, and I’d very much still add in a line item for “takeout food because when you’re moving two people and a dog and your whole kitchen is in boxes, sometimes you just need to get the pizza.”
- I’d still have gotten pre-approved for our mortgage, because it gave us the confidence we needed to make an offer on our house when the opportunity came up.
- And I’d very much still have created a rock-solid budget with estimates of all of our new home-ownership costs, to make sure we weren’t taking on more than we could afford.
But there’s one thing that I have to own up to, that I very much didn’t give a lot of thought when we were buying.
I didn’t pay much attention to the mortgage stress tests
Sure, I looked over what our payments could be at different interest rates, but it seemed really academic. Technically speaking, we also did pass a stress test, based on when we got our mortgage—but it was never a big deal, or top of mind like it is today.
Sidebar: What’s the stress test?
If you’re getting, refinancing (!), or renewing (with a new lender) (!!) a mortgage in Canada, all federally regulated banks will need to make sure you can qualify using a higher rate than what you’re currently paying (either the Bank of Canada’s five-year benchmark rate, which is 5.14%, or your contractual rate plus 2%). By qualify, it means they’ll check that how much you pay for your housing costs, and your total debt payments, are within the bank’s normal limits, even with the higher interest rate.
Long story short, it protects you from taking on too much mortgage and being in a really bad place in a few years. (Because of that, I’m actually a big fan.)
Since we got our mortgage, rates have gone up. Three times.
All of a sudden, yes, thinking about what interest rates are going to do in the next few years is very much A Thing you need to pay attention to when buying a house.
Luckily, BMO has calculators for that
One of the best things I did to prep our budget for home-buying was to rely extensively on different calculators available online. I’m not going to lie, I was a bit of a calculator connoisseur, so when I started looking into BMO’s mortgage calculators this year, I was hooked.
(Seriously, I probably got derailed for a solid half an hour, and I’m not even buying a house right now.)
There are two specific calculators I wish I had when we were in the process of buying last year, to look at how the impact of a mortgage rate increase would change our monthly budget.
The first one is a great, comprehensive affordability calculator that uses the Bank of Canada’s stress-test rate. It shows you a really clear picture of what you can afford—not just now, but in a few years when rates go up.
It takes into consideration a number of factors, like your income, and a bunch of other things you’re paying for every month, like any student debt or car loan payments, your property taxes, and how much you expect to spend on things like heat and maintenance. If you expect to have condo fees, you could add those in as well. It gives you a clear overview of how much you can afford, but critically, it also shows you exactly how much that borrowing will cost on a monthly basis.
If you have a solid idea of what you can spend on housing every month, this is the best way to make sure that you won’t end up paying way more than that at a potentially-higher rate in the future.
But it’s not just about payments
I’ve written a ton about why everyone needs to consider the total cost of owning a home when they start screaming from the rooftops that everyone should buy, but there’s no better way to illustrate it than by seeing the total interest you’ll pay over your mortgage term in black and white (or in this case, navy and white).
For this calculation, I was looking at house that costs $474,000, which is the average Canadians are expecting to spend on a house this year. I assumed they’d put about $40,000 down, so this mortgage was for $434,000.
And over 25 years, they’d end up paying $374,618 in interest. Yup, almost double the price of the house.
Which again, is totally OK! It’s not at all a reason not to buy a house, but it is a reason to make sure that you can still save money for retirement when you do. The value of your house will go up, but you’re paying things like mortgage interest and property tax while they do.
So what would I do now if I was buying a house again?
I’d sit down a make my budget, the exact same way I did last year, to figure out how much we should reasonably be allocating to mortgage payments every month.
Then, to make sure we weren’t aiming too high with our target house price, I’d plug that number into BMO’s affordability calculator, to see what that amount would pay for at 5.14% interest. That would be the target price I’d aim for when we looked at houses to buy, and the price I’d go get pre-approved for before we started looking.
And then, when we found a house we liked, and had a real sense of how much we were going to spend, I’d plug those numbers into BMO’s calculator and take a look at how changing different variables would impact both our monthly payment and the total cost over our loan term.