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How much financing

can you really afford?

YYou've read the books, you have the down payment, and know what type of property you're looking for ? so how do you decide which loan is right for you, and how much you can afford? The first step for any investor is knowing exactly what you're worth, and how much cash flow you have to spare, says Farhaneh Haque, the Director of Mortgage Advice from TD Canada Trust.

Working out your income

You know you want to invest in

and expenses

Determine your net worth by looking at

property, and you might even have

your assets, and your debt. It's important to write down all forms of income and all

a property in mind, but how do you

your monthly expenses ? and you might be surprised where your money is coming

know what you can afford and which mortgage is right for you? Caitlin

from and going. While most people know what their main source of income is, and could list their major expenses, it's easy

Nobes asks the experts

to discount some of the smaller amounts. Part-time work and income from

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Borrowing

Your total debt should not

exceed 42% of your income

investments or pension can add up, and in the other direction it's easy to forget monthly costs such as phone and internet charges.

When you know exactly how much personal cash flow you have, that's when you can start thinking about what you can do with that money. However, these aren't the only numbers that matter.

Focusing too much on down payment can leave investors without a cushion, Haque says.

"Most often what we see is they haven't really thought through their entire budget situation and factored in all the costs. What would happen if you don't have tenants for six months?" she asks.

Have a strategy

It's vital to strategize before buying to know what kind of mortgage is the best. If you plan to sell within three years, a five-year term is a mistake.

She suggests using an online mortgage calculator, which allows you to put in your annual income, total debt payments, and available down payment to get an idea of how much financing you would qualify for.

The important thing for investors to remember when using these tools is that while a real estate consumer can get up to 95% financing, an investor is limited to 65%?75% at the most. The recommended guideline was to have 30%?35% of your own assets to put towards an investment purchase.

This gives the investor a buffer in their budget to protect against unexpected expenses. Total debt still should not exceed 42% of income, Haque says.

"If you bought a rental property investment you can count on some of that income, but you need to evaluate whether you can afford it without the rent. Keep

Checklist 1 What documents do you need when applying for a loan?

Final purchase contract for the house (if applicable) Pay slips for each applicant and Notice of Assessment Personal and business tax returns for the previous two years (some

lenders may require three years tax returns if you are self-employed)

Account numbers for all bank accounts, along with account

statements

Information about debts, including loan and credit card account

numbers and account statements

Evidence that your existing mortgage account has been paid

regularly for the last six months in line with your loan agreement if you are refinancing Evidence of rental income for existing and/or proposed investment properties.

Checklist 2 Improving your loan application

Get your documentation right first time. For reasons best known to

themselves, lenders can often take a while to discover inadequacies in documentation. Requests for clarification and further documentation can then take up valuable time and delay settlement

If your creditworthiness is borderline, explore the following options:

Pay off your credit card and close down any extra cards you don't

need. If you can't bear to do that, reduce your credit limit to free up your ability to carry a mortgage.

If you're buying investment property, buy a property with a high

rental yield

Consult someone with knowledge about which lenders would

assess your serviceability most favourably. Some are best for investors, others for owner-occupiers

If you're an owner-occupier, a mortgage-helper tenant could help

you meet your repayments though you'll be hard pressed to find a lender who'll recognize this as rental income unless the tenant occupies a self-contained suite.

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Fast track your loan application

What can you do to improve your chances of getting approved? These five tips will help you get that final tick of approval:

1. Get preapproved, but understand what type of preapproval your broker/banker is performing Not all preapprovals are created equal, so it's important to understand what kind of prequalification you've been provided. Whether or not the mortgage specialist has done credit checks and verified income and the source of your down payment could affect whether you're approved in the final stages.

2. Bring in all verifiable information Be sure to bring in a letter that states your income, pay stubs, banking information that verifies the source of your down payment. Having that info all readily available will provide you with a preapproval with less conditions (some say subject to satisfactory income or down payment verification). Get all that stuff out of the way, so it's one less thing to worry about.

3. Ask to have your banker/broker check your credit history Not all bankers/brokers will do this at the preapproval stage. However, it could prevent you from getting final approval. So if you're not sure, ask.

4. Build credit history, if you don't have any Apply for an RRSP if you're in the soft stages of buying a home. It will appear on a credit report. That loan is going to create the down payment for you.

5. Avoid lavish purchases and job changes Don't run out and buy cars or run up credit cards before you buy a home because it will affect the amount you can qualify for. In addition, don't change your job within six to eight months of buying, because a lender will look at that, but, depending on the industry you work in, if it's a natural progression, it will be looked at differently.

Lending criteria

Income stability, including employment continuity (if employed) or income continuity

(self employed)

Satisfactory equity contribution, such as a deposit

Satisfactory security property (high rise and special purpose living ? like retirement

villages, student accommodation and rural residences ? are all worse security than low rise residences in major population centres)

Unblemished credit history

Guarantors (if you have problems with any of the above, can you bring partners or

parents into your purchase).

Lenders use the five Cs of credit when assessing your ability to pay back a mortgage. ? Credit history. Your lender will want to make sure when you've borrowed money,

you've paid it back ? Capital. Ensuring you've accumulated assets ? Collateral. When it comes to a mortgage, you're putting your house up as collateral ? Capacity. In short, capacity is debt servicing. For instance, your housing cost shouldn't

exceed 30%?32% of your gross income and all of your debts shouldn't exceed 40%?42% of your gross income ? Character. It's an evaluation of all four previous Cs as well as subjective and objective things such as how long have you been in your job, what type of job you have and how long you have lived in your current residence

the mortgage payments manageable to your budget."

Think long term

A major mistake Toronto financial planner Sudhir Bhalla sees is short-term thinking. People know their cash flow and have worked out their finances, but fail to take into account future changes in interest rates, their own income and their personal situation.

"It's a very low interest environment, which is luring people to buy more, but I always try to qualify them at a higher rate, so in the worst case scenario they will still be able to afford it," says Bhalla, who owns Toronto-based GN Financial Group Inc.

While the government suggests a total debt ratio of 42% of total income, Bhalla says investors need to take a "worst case" view of the future ? running numbers based on 42% debt ratio, 3.5% interest and assuming a property will always have tenants is a sure-fire way to run into trouble.

Bhalla has seen clients have to sell a property due to their financial

mistakes, and says investors cannot put other savings on hold, assuming their investment will perform well to make up for it. Health issues and job changes aren't usually predictable, so investors should avoid tapping out all their financing options and leaving themselves vulnerable in an emergency.

Who's on your team?

Calgary-based investment realtor Randy Bett, president and CEO of Better Group Real Estate, says he often sees investors who have failed to consider costs such as lawyers, accountants and property managers in their calculations.

"We walk people through those additional costs ? plus repairs and maintenance, vacancies, condo fees or insurance ? the factors that don't get calculated in. We always factor property management in as well, which a lot of people don't think of."

When helping investors find properties, the first step is to determine what returns the investor is looking for, then looking at areas and types of property that fit both

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Avoid these common mistakes

Misjudging the overall cost of a property by focusing on the down payment. Every property needs maintenance or small improvements, often before tenants can move in. Make sure you calculate these expenses. Forgetting to develop a strategy for a property. If you don't know how long you intend to hold a property you can't judge how long a term you need and what aspects of a mortgage deal are most important. Not calculating your risk tolerance. The experts agree ? interest rates will go up. It might take a few years but if you've made all your plans based on 3.5% you could be in for an unpleasant surprise when you have to renew at 5.5%. Leaving yourself no buffer. If you borrow to your outer limit, relying on the property's income remaining steady and your personal situation being stable or improving, you leave yourself vulnerable if any one part of your plan doesn't go smoothly.

their expectations and their budget, Bett says. Some cheaper properties can have high cash flow, but may be in an area or of a type that attracts tenants who require more management.

Part of balancing financing with investing options is deciding how much your time is worth. You might be able to forego a property manager but you need to be aware of how much time and effort is required.

When it's time to find a deal, Bhalla suggests finding a knowledgeable broker who can access financing streams aside from the major banks.

Other experts suggest that if you have a good relationship with your bank, that's a good place to start when looking at your overall financial situation.

"It's about where you have a relationship and who you feel comfortable with," Haque says. "You want to be able to talk about your full financial plan. If you don't have a relationship with anyone, ask friends and family for recommendations, as long as they're knowledgeable and a mortgage professional."

Farhaneh Haque used TD's mortgage calculator to look at the different levels of financing investors might access based on their personal situations. The scenarios, taking debt and personal expenses into account, show the maximum amount that should be borrowed.

All figures are based on a five-year term at 3.49% with a 30-year amortization.

Scenario 1:

Andrew and Mary own their own home but are otherwise debt free and are looking for an investment property.

Annual income: Total monthly payments: Down payment: Maximum purchase price: Maximum mortgage:

$100,000 $2,400

$81,000 $215,400 $134,200 (62% loan-to-value)

About the investment property Residential Monthly costs: Monthly mortgage payment:

$350 $600

Scenario 2:

Mark and Taylor do not own their home. They are looking to buy a primary residence with a separate suite to rent out.

Annual income: Total monthly payments: Down payment: Maximum purchase price: Maximum mortgage:

$100,000 $800

$100,000 $500,000 $400,000 (80% loan-to-value)*

About the investment property

Residential

Monthly costs:

$350

Monthly mortgage payment:

$1,788

*Could qualify for higher ratio loan because it will be their primary residence

Scenario 3:

Sophie and Cameron own their own home, have $600 a month in debt repayments and are looking for an investment property.

Annual income:

$125,000

Total monthly payments: $2,400 (mortgage and debt repayments)

Down payment:

$98,000

Maximum purchase price:

$280,000

Maximum mortgage:

$182,000 (65% loan-to-value)

About the investment property Residential Monthly costs: Monthly mortgage payment:

$350 $813.70

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