I can afford what? Mortgage specialists are nuts

“You must be insane” is what we thought after our mortgage consultant told us what she thought we could afford. After talking to friends, I realized we were not the only ones. Everyone I know seems to have had the same reaction after visiting their bank. Mortgage specialists in general must be on some hallucinogenic that makes them see money everywhere. From what I here, the drugs are even more powerful in the U.S.

My husband and I bought what I consider to be an expensive home and since we made the decision, I have been freaking out. I’m one of those people that obsesses over decisions I already made. So since we bought the house, I continually check new websites to make sure we didn’t make a mistake and buy a house that is out of our means, even though we bought something well below what our specialist told us we could afford.

I’ve surfed financial blogs, governmental websites and everything I could find. In the end, I realized that I was not really content with any of the calculations people proposed. They are either way two generous with your house budget or way too strict. Here is a summary of the formulas to calculate what you theoretically can afford. I’ve added my comments, because well it’s my blog and I get to do that.

The most popular method of calculating what you can afford seems to be the 32/40 rule. From what I can tell, a version of this rule is what banks use to pre-qualify you for a mortgage, it explains their insanity. According to this principal, your monthly payments (Interest, principal, and taxes) should equal a maximum 32% of your gross monthly income as long as your total debt payments remain below 40%. I would add heating costs to this as we live in Canada and this can be a significant expense. For JF and I, the resulting payment was astronomical, way more that we ever figured we could pay without eating Lipton chicken soup for the rest of our lives. You can find a worksheet here to help you calculate what you can afford. I prefer it to calculators as it actually explains the calculation.


Based on the 32/40 formula, a couple with a gross income of $100 000 a year, who owns one compact car that they lease, should theoretically be able to swing a $2 500 monthly mortgage payment (assuming property taxes are about $3 000) or a 354 000 mortgage. However, after taxes, the couple is really only making around $65 000 a year or $5400 a month. Their house, utilities and car combined would take up about 65% of their realized income, and they haven’t eaten, clothed themselves, or paid for daycare yet, nor have they put a penny in savings. It does not seem realistic to me. If you followed this principal you would you nothing left for a romantic weekend or any type of fun activity for that matter. Forget the La Perla lingerie girls, it’s all going into your house. You can read more about how this does not make sense on the It’s Your Money blog.



The same blog that makes fun of the 32% and 40% rule proposes a much more insane idea. Your principal, interest and taxes should equal no more that 25% of your take home pay. So, if we take the same couple as before, there maximum monthly payment would now equal about $1000 (assuming again $3000 a year in taxes).
If as he suggests, they need to pay their house off in 15 years, this couple could afford a mortgage of about $165 000. Assuming they put a generous 40K down, they are looking at a $200,000 house. If you want to see what a $200 K house looks like in Montreal, the picture posted here is of a home in St-Laurent currently on sale for $199K. Keep in mind, the average family income in Quebec, for a couple, is around $55K, so imagine there lovely home if they followed that rule.

My suggestion, I like the idea of the 32/40 rule as long as you use your net income instead of your gross income. This is more realistic in my opinion as it deals with actual cash you will have on hand, not some fictional amount. Based on this, our couple can now look to buy a $290 K home without worry and pay off there mortgage in 25 years. That seems logical to me.

I also think it makes sense to look at your expenses and build a monthly budget based on your actual spending. This will help make sure the payments work with your lifestyle. If you love to eat out every night at the hippest restaurant or travel to exotic locations, it may make sense to spend less on your house and more on other activities. If you decide to buy a more expensive house, you will also be able to pinpoint what sacrifices you will make.

In the end, if you follow the first principal and are over, you’re probably screwed. If you followed the second, your financially fine and can easily afford the Raid you’ll need to fight those friendly roaches that you are sharing your house with. The third principal, well it’s my favourite because it’s about what we are doing for our home and thinking it’s the best method helps me sleep at night.

I promise less serious articles in the future.

Pam