There are a variety of different factors involved when you’re thinking about buying a house on PEI. We’ll break down the different financial factors below, but if at any point you have questions or want to chat further, reach out to a member of the Kickham Properties team and we’ll get you moving in the right direction!
Mortgage Rates & Terms
We’ll first want to take into consideration the types of mortgage rates and terms. A more popular term would be the 5-year term. When we look at Canadian lenders, you will most likely be looking at a rate of 4.59%-5.55% (approximately and these change, so be sure to chat with your lender for current rates!). The monthly payment would then most likely be in the range of 15-20%. This term may have a lump sum pre-payment plans between 15-20%.
The Market
Now, let’s shift gears to look at the average sale price across PEI as of the last quarter of 2022, which was $401,229. Of course, within PEI there are a variety of smaller markets that would affect this average price and some areas will be higher or lower priced than others. Depending on where you’re looking to buy, it would be a good idea to meet with a REALTOR® to get an in-depth look at the market and figure out the average price based on where you need or want to buy.
Your Finances
Lenders will typically look at a couple of things, including:
- Your Gross Debt Service Ratio. A good rule of thumb is that your housing costs (mortgage principal, interest, taxes, and utilities) should not exceed 32% of your gross income.
- Total Debt Service Ratio. Lenders will also look at your total debt service ratio, which is essentially the housing costs mentioned above and any other debts you have such as car payments, credit cards, etc. Ideally, you wouldn’t want this Total Debt Service Ratio to exceed 40% of your gross income.
Let’s say you’re a couple with a household income of $140,000 per year. And let’s also say your present bills account for approximately $2000 per month, and you get a rate of 4.59%, with a down payment of 5%. With these numbers, you would most likely get approved for $401,200.
Now, there will be additional factors that a lender will look at when deciding your approval amount (such as your credit level) but we’re simply looking at the main items.
One of the first questions a REALTOR® may ask a potential buyer is whether they have secured their financing (eg. are they pre-approved) as it is a very important aspect to have completed before searching for a home, for a number of reasons. Ideally, you’ll know your threshold of what you can afford so that you’ll look at the appropriate houses (nothing is worse than falling in love with a house only to find out you aren’t approved for that price range!) and if you were to get into multiple offers on a property, you’ll know how high you’re able to offer before it goes beyond your means.
If you meet with a lender and find that the price range you’re giving for pre-approval doesn’t meet your standards, you’ll at least be able to come up with a plan to lower your debt, increase your credit rating and obtain a higher approval down the road.
Any of our team members with Kickham Properties would be happy to meet with you and answer any of the questions you may have about buying a home and help you get started. Reach out today and let’s get you moving in the right direction!
