How much interest would I pay on a $400,000 mortgage?
You will pay approximately $200,748.28 in interest over the life of your 25 year mortgage with a 3.50% fixed interest rate, which is 50.19% of your total mortgage principal. You can minimize the amount of mortgage interest you pay by prepaying your mortgage principal.
If you go with a 10 year amortization, you will pay approximately $74,652.18 in interest over the life of your mortgage, which equates to 18.66% of your total mortgage principal.
How do I calculate how much income I need for a $400,000 mortgage?
The first step to your homeownership journey is getting a mortgage pre-approval, which will generally tell you the maximum mortgage amount you can afford. However, it doesn’t guarantee that you will get that amount. Your mortgage lender will take into account your credit score, income, monthly expenses, debt, your down payment (the larger the down payment, the less you need to borrow) and other savings you might have. This will help them calculate your debt-to-income ratios and determine how much mortgage you can afford.
To determine whether you can afford a home will depend on a variety of factors, such as your debt service ratios, passing the mortgage stress test and whether you will need mortgage default insurance.
The maximum Gross Debt Service Ratio (GDS) limit used by most lenders to qualify borrowers is 39% and the maximum Total Debt Service (TDS) limit is 44%.
- The first step is to calculate your Gross Debt Service Ratio. Your total monthly housing expenses such as mortgage payments, utility bills, property taxes, etc. will be evaluated against your monthly income. Your monthly expenses should not exceed 39% of your gross income.
Annual Income ÷ 12 = Monthly Income
Monthly Income x 0.39 = Maximum Gross Debt Service
For example, if you make $100,000 a year:
$100,000 ÷ 12 = $8,333 monthly income
$8,333 x 0.39 = $3,250 is the max of what your monthly expenses should be
- The next step is to consider any debts you might have which includes student loans, lines of credit, car payments, credit cards, child or spousal support payments. This Total Debt Service amount should not exceed 44% of your gross income.Monthly income x 0.44 = Total debt service$100,000 x 0.44 = $44,000 is the max of what your total debts should be
Mortgage stress test
The stress test will help you determine your mortgage affordability and to ensure that you can still afford your mortgage payments if interest rates rise. Homebuyers must qualify for a mortgage at the current benchmark rate of 5.25% or your current or target interest rate plus 2%, whichever amount is larger.
You can also use your down payment as a benchmark to determine your maximum affordability.
If your down payment is $25,000 or less, you can find your maximum purchase price using this formula:
Down payment ÷ 5% = Maximum Affordability
$25,000 ÷ 5% = $500,000 maximum affordability
If your down payment is $25,001 or more, you can find your maximum purchase price using this formula:
(Down Payment Amount – $25,000) ÷ 10% + $500,000 = Maximum Affordability
If you have $30,000 for your down payment.
($30,000 – $25,000) ÷ 10% + $500,000 = $580,000 is your maximum affordability.
If you have a mortgage with less than a 20% down payment you will be required to purchase mortgage default insurance, often referred to as CMHC insurance.
Mortgage Default insurance
If you have less than 20% down payment, you will need mortgage default insurance. The premium is based on the loan-to-value ratio (mortgage loan amount divided by the purchase price). The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments. The exact premium will be calculated when you apply for a mortgage and provincial sales tax may apply.
Here is a general idea of the premiums charged by CMHC.
||Standard Purchase Premium
|Up to and including 65%
|Up to and including 75%
|Up to and including 80%
|Up to and including 85%
|Up to and including 90%
|Up to and including 95% Traditional Down Payment
Taking into account everything listed above, it can seem very overwhelming. It’s best to work with a mortgage advisor to make sure the calculations are done correctly so you know exactly how much you can afford and how much you need to be making in order to get a $400,000 mortgage.