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Comment by ranit | Hacker News Reader

> Canadian banks has a very conservative “stress test” ... Therefore it isn’t possible to “stretch yourself beyond any reasonable limits”

“stretch yourself beyond any reasonable limits” means that you may not be able to pay your mortgage, it doesn't mean the bank won't offer it to you.

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The bank won't offer if you can't pay, at least in the US these days. But we have 30 year fixed mortgages, I think Canada is shorter

The norm in Canada is 30 year term, with a variable rate. It's the second part that can really get you...

30 years hasn't been possible in Canada for several years now (thankfully).

What is normal? It's hard for middle class people to afford normal housing stock in highly advanced countries without 30 years of amortizing debt. Yes, I understand that some countries force you to chain bullet mortgages over ~30 years to achieve a similar effect.

Why is that a good thing?

That makes sense, I would be terrified putting 40% of my pre-tax income towards a mortgage with a variable rate

I think you're conflating mortgage term (which is typically 5 years fixed or variable in Canada) and amortization. The latter can go up to 25 years for CMHC-insured loans at the time.

In a sense you are both right, you just don't set the threshold at the same place.

The bank will look at how much you earn and how much you owe and say "We can pre-approve you for $X at Y%". They consider that you can pay that rate and they are most likely right.

Now if you do take $X, you have effectively leveraged your entire earnings, which for most people is a pretty bad idea because stuff happens and you can end up with a mortgage you can't pay because turns out you also want a car.

That being said (at least in Canada), your broker won't really let you take the full bank offers, or at least they don't expect you to do it.

In the US, most lenders will do between 36 and 43% of your earnings pre-tax. Assuming you pay another 25 to 30 in taxes, this should be half of your disposable income, leaving 50% or cars food Etc.

For a $5,000 mortgage, that's a $5,000 a month buffer

Um. Look at your numbers again. Assuming your 36-43% is correct (I haven't shopped a mortgage in almost 15 years), that puts the combined total at 61-73%. Also, that combined tax rate feels really low for anyone with the income to effectively bid in this current market. Add up SS and Medicare taxes, federal income taxes, state income taxes, and sales taxes and 30% feels like a floor rather than a ceiling.

EXAMPLE: 120k income breakdown (10k/month):

Federal actual rate 16.5% (24% marginal)

CA State actual rate 6.4% (9.3% marginal)

Medicare rate 1.45%

OSDI rate 6.2 %

CA SDI rate 1.0%

Total:31.55% total before tax deductions and tax shelters

If your mortgage is ~40%, you have ~30% left over.

Per month, this is 4,000 for a mortgage, 3,000 taxes, and 3,000 remainder.

A 4,000/month mortgage covers a 800k loan on $1 million dollar home.

You don't get a lot of house in the bay area for 1 million, So if you are single earning this much, you are looking at condos.

If have two similar earners, you just double everything. E.g. 2 million dollar house with $6,000 per month remaining income.

You are not going to get an 800,000 loan with a repayment of $4,000/mo on a 120K income. For one, that's in jumbo loan territory with more onerous requirements for DTI above and beyond 20% down payment.

You haven't factored in property taxes, home insurance, or anything. Putting these numbers into a calculator, your monthly loan payment is going to be closer to $5,400 a month.

You're taking home $6,800 a month.

You're not living on $1,400 a month in the Bay Area.

No bank is giving you this loan.

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