How to budget for your monthly mortgage payments

So, you're thinking about buying a home in Canada and want to make sure your monthly mortgage payments are well-budgeted for? Great idea! Budgeting for a mortgage is an important step towards financial stability and peace of mind. Think of it as a part of the 50/30/20 rule. It's all about planning ahead and making sure you have enough funds each month to cover your mortgage payments, without sacrificing your other financial goals. 

With a little bit of preparation and a few smart tips, you can make sure your monthly mortgage payments are manageable and stress-free. 

How the interest rate you choose can impact your budget

First off, when choosing a mortgage, one of the key decisions you'll need to make is whether to go with a variable-rate or fixed-rate mortgage. And this decision can have a significant impact on how you budget for your monthly mortgage payments.

With a variable-rate mortgage, the interest rate can go up or down based on changes in the prime rate set by the Bank of Canada. This can make budgeting for your monthly mortgage payments more challenging, as you'll need to be prepared for the possibility of higher payments in the future.

On the other hand, with a fixed-rate mortgage, the interest rate stays the same for the entire mortgage term, typically 2 to 5 years. This makes budgeting for your monthly mortgage payments much easier, since you can be confident that your payments will stay the same for the duration of the loan.

If you're someone who likes the security of knowing exactly what your monthly mortgage payment will be, a fixed-rate mortgage may be the better option for you. However, if you're comfortable with the possibility of higher payments in the future and are willing to take on a bit more risk, a variable-rate mortgage may offer a lower interest rate and lower monthly payments in the short-term.

Ultimately, the choice between a variable-rate and fixed-rate mortgage will depend on your personal financial situation and risk tolerance.

Steps to budgeting for your monthly mortgage payments

Budgeting for your mortgage before you even get a home will help you decide what home you can fiscally afford. With your interest rate in mind, there are still ways to help you determine how much you’ll need to pay per month when it comes to your mortgage. 

Step 1: Determine your monthly income

The first step in budgeting for your monthly mortgage payment is to determine your monthly income. This includes all sources of income such as your salary, any additional side jobs, and any other sources of money you may have. Knowing your monthly income is the foundation for your budgeting process and it's important to be as accurate as possible.

Step 2: Figure out your monthly expenses

Next, you'll need to figure out your monthly expenses. This includes all your monthly bills, groceries, transportation costs, and any other regular expenses you may have. You can start by making a list and grouping them into different categories such as housing, utilities, food, entertainment, etc. This will help you get a clear picture of how much you're spending each month and where your money is going.

With a mortgage it’s also important to factor in that your monthly payments won’t just be the mortgage payments themselves, but also your property tax fees as well as home insurance (and mortgage insurance, if you offered less than a 20% down payment). 

Step 3: Calculate your monthly mortgage payment

Once you have a good understanding of your monthly income and expenses, it's time to calculate your monthly mortgage payment. 

Your monthly mortgage payment will be made up of two parts: your principal and interest. Your principal payment will go towards paying down the balance of your loan, while your interest payment is the fee charged by the lender for lending you the money.

How much you’ll pay for your mortgage each month will depend on several factors, including the amount of your loan, your interest rate, and your amortization. You can use an online mortgage calculator to estimate your monthly mortgage payment based on these factors.

Step 4: Adjust your budget if you need to 

Once you have calculated your monthly mortgage payment, it's time to adjust your budget to accommodate it. You may find that your mortgage payment is higher than you expected, or that your monthly expenses are higher than your monthly income.

If your mortgage payment is higher than your monthly income, you may need to consider ways to reduce your monthly expenses or increase your monthly income. This could include cutting back on unnecessary expenses–such as how often you may be ordering take out versus cooking at home–or finding additional sources of income, like a side job or freelance gig. This could also mean finding cheaper deals for your phone or internet plans, or shopping around for more affordable service providers.

Step 5: Stay on track and on top of your payments

Once you've adjusted your budget to accommodate your monthly mortgage payment, it's important to stay on track. 

Regularly review your budget to make sure you're staying within your monthly income and expenses, and make changes if  needed. This could be done by a simple spreadsheet or a more advanced budgeting software. 

Step 6: And ensure you build an emergency fund

Life is unpredictable, and you never know what kind of unexpected expenses might come your way. Having an emergency fund means you'll have a safety net to fall back on in case of  a medical emergency, car repair, job loss, or any other unexpected event.

So, how much should you aim to have in your emergency fund? A good rule of thumb is to aim for three to six months' worth of living expenses. This might sound like a lot, but don't worry! You can start small and gradually build up your emergency fund over time. Just make sure to set aside a little bit each month until you reach your goal.

Lastly, make sure to keep your emergency fund in a separate account that is easily accessible. That way, you can quickly access the funds if you need to without having to jump through any hoops. So start saving now and you'll be happy you did when life throws you a curveball.

The bottom line

By understanding your monthly income and expenses, calculating your monthly mortgage payment, adjusting your budget, staying on track, and building an emergency fund, you can ensure that you're in a good financial position to make your monthly mortgage payments and enjoy your new home. 

It also helps you understand how much of a home you can afford, so you won’t feel the weight of your payments each month. 

So if you're ready to start your home buying journey, consider applying for a mortgage with Pine and we’ll put you in touch with one of our mortgage agents to help.