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I tried searching, but did not see one specific to Canada.

I have a home I'm living in worth approx. $180,000. I owe approximately $126,000 on the mortgage, which I have been paying extra towards since day one. It is my only "debt", although I have other payments:

  • Utilities - $100/mo
  • Natural Gas - $65/mo
  • Electricity - $55/mo
  • House Insurance - $45/mo
  • Car insurance - $115/mo
  • Child support - $300/mo
  • RRSP contribution - $50/mo
  • Life Insurance (and others) - $130/mo
  • RESP contributions - $125/mo
  • Cable - $90/mo
  • Current mortgage payments (including city taxes) - $501 twice a month

I gross $60,000 per year. I own my car outright, and typically save up to buy consumer products. My credit card is only for emergencies and fuel for my car, which is paid off every month in full. The remainder of my money goes towards an emergency fund, and purchasing investments.

My goal is to buy a home with my girlfriend, hopefully up to approximately $375,000. I would like to keep my current home, and turn it into a rental property after I purchase a new home.

Question: Is it possible to use the equity of my current home while keeping it, or should I save up more money to use as a down payment on a new home?

  • Quick question, maybe I'm ignorant of Canadian norms: Why is "Natural Gas" and "Electricity" separate from "Utilities"? – Undo May 29 '18 at 0:38
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    @Undo Utilities (at least in my town) are city-provided services - garbage removal, recycling pickup, water and sewage services, etc. Provincial or national companies handle the natural gas and electricity, so they're separate. – Canadian Luke May 29 '18 at 16:02
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Right. This is a complicated situation. You need 20% down to buy an investment home, and new mortgage stress test rules mean you have to be able to survive a 2% increase in the interest rate (citations: https://globalnews.ca/news/3897942/new-mortgage-rules-2018-canada-guide/ and https://globalnews.ca/news/4097215/canada-new-mortgage-rules-stress-test-2018/)

You currently have approximately $54,000 in equity in your home. The Canada Mortgage and Housing Corporation has a handy Mortgage Affordability Calculator. Plugging in your figures (with $200 as the expected monthly property tax and $65 as the monthly heating costs), along with a downpayment of $54,000 and a 25 year amortization at 5%, I get the maximum house price of $283,537.

Now, you aren't buying an investment home, you are converting your current place into an investment home and buying a new, primary residence. Here's where things get difficult. They are going to want you to maintain at least 20% of the value of the current place, I expect. That means keeping at least $36,000 in equity in your current place, leaving you with available equity of about $18,000. If you are using that as downpayment on a new place, that represents 5% of $360,000. But, you really want a larger downpayment. Ideally, you really want a 20% downpayment, plus a few percent for closing costs.

A rough rule of thumb is that the bank may be willing to give you a mortgage of up to 4x your annual gross salary, but you'll be a lot happier servicing no more than 3.2x your annual gross salary. You get to count expected rental income in there, but not at the full amount. There'll be costs you'll have to cover during the rental period, and you aren't guaranteed to have a renter in the property full-time. A rule of thumb is that you get to "book" 9 - 10 months of rental income per year. If you are still where I think you are :), that's probably roughly $1000/month of extra income, meaning you'd adjust your gross salary by an extra $10,000 or so per year.

Your goal of using your current property for a rental and buying a new home somewhere up to $375,000 is a stretch, but is not beyond the realm of possibility. It's worth discussing with your bank. However, you'd be a lot more comfortable if you could save another $50,000 or at least, another $20,000. That sounds like a huge amount of money, but this is my opportunity to remind you there are concerns about the Canadian real estate market at the moment.

At no point did I consider any income your girlfriend may contribute. If you are buying a home together and she makes the same income as you, this is very achievable. If you take that route, I strongly suggest a legal agreement (or, as in my case, a non-lawyer but plain-English agreement) between the two of you, in case things go badly.

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    Great comprehensive answer. – Grade 'Eh' Bacon May 28 '18 at 22:07
  • Very good answer. Don't you want to account for the interest on the equity line of credit if that was in the picture as well? Once again great detailed answer. thnaks – Stryker May 31 '18 at 4:27

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