In an ideal world, you would be able to repay all your debts before buying a house. On the other hand, as more and more Canadians have credit card debt, the idea of buying a home only after paying off all of its debts becomes a concept of the past.
So, can you afford to buy a house while being in debt with a credit card? The answer is yes, but it will certainly make the process of buying a home more difficult. Here are two ways that a credit card debt negatively affects your ability to buy a home:
Credit card debt will limit the size of your mortgage
Several factors are used by lenders to determine the maximum mortgage amount that you can afford. These factors include your income, the size of your down payment, and whether or not you have debt.
Lenders will look at two ratios: your gross debt-to-debt ratio (DAR) and your total debt-to-debt ratio (DAL). The ABD ratio includes your housing costs, such as your mortgage payment, property tax, heating costs and 50% of your condo fees (if applicable). All these sums are added together and divided by your gross annual income.
Your credit card debt could hurt your credit
One of the factors that your lender will use to determine your viability as a borrower is your credit rating. Many factors determine your credit rating, but one of them is the use of your credit.
Your credit usage is the percentage of credit card debt you own in comparison to your total credit limit. Ideally, you should not have more than 35% of the total limit on your credit card. For example, if you have a credit card with a limit of $ 10,000, you should not have a balance over $ 3,500. If your credit cards are often maximized or close to their limits, your credit rating will drop.
Having a high credit is important because it allows you to be eligible for the best mortgage rates currently available from the most demanding lenders.
If you buy a house at a cost of $ 450,000 with a 5% down payment and qualify for a mortgage with a competitive interest rate of 2.33%, your monthly payment will be 1,947 $. According to our mortgage calculator , you will pay $ 141,120 in interest over the life of the mortgage.
But if your credit is not good, you may not qualify for a preferential interest rate and will have to make a larger down payment. Suppose you want to buy the same house for $ 450,000, but you need to put 15% down and the interest rate on your mortgage is 4.33%. Your monthly payment will be $ 2,118. According to our mortgage calculator, you will pay $ 246,163 in interest over the life of the mortgage.
If you have a good credit rating and a reasonable credit card debt, you will not only be able to afford a bigger mortgage but you will have lower monthly costs, you will benefit from relatively low interest rates and finally you will save money on the overall cost of your home. Buying a home in Canada while having credit card debt is possible, but buying a home without credit card debt is much simpler.