For most people, if you’re going to apply for a loan, you go for broke. Get the bag. Reach for the stars so you at least hit the moon. You’ve got this number in your head, sure, but does it really include all the important details? Monthly payments, taxes, fees, the difference between principal and balance? And do you have the income to support the dream?
What is a Loan Amount Called? (Spoiler: It Has Like Four Different Names, and Yes, They All Matter)
The simple fact is: the amount you borrow changes names depending on where you are in your repayment process. And knowing what kind of loan you have will determine whether or not you’re surprised at the end of the month.
As a borrower, the principal is the amount you originally borrowed. That’s 101. You want $50k for a new commercial kitchen? That’s your principal. Now add in interest, which is the lender fee for borrowing that money.The balance is what you still owe at any given time, and this is a combination of what remains of your principal amount plus any unpaid interest that you’ve accumulated. Now add in your taxes and fees.
Fees, you say? Yeah, we say. Setup fees, appraisal fees, legal fees, and sometimes prepayment penalties if you pay off the loan too fast. Every lender will include a variety of fees to cover the processing and protection tied to lending money in the first place. Your broker should be able to give you a rough estimate of the “all in” cost of the loan, all things considered, so ask before you sign.
Brokers, you can add value to their services by defining all the loan terms, assuming your client doesn’t know, and making sure they are making a crystal clear decision. This protects your reputation, and avoids unpleasant conversations down the line. Be clear about the difference between principal and balance. Avoid the conversation that starts with “I only borrowed $50,000, so why do I owe $52,000.” Explain up front the cost of the loan, and make sure to explain that taxes and fees are extra, unless you structure them in. A $400,000 commercial mortgage with $10,000 in fees rolled in is a $410,000 loan and affects the LVR (loan to value ratio) so that is what you present and get them to initial. They will appreciate the transparency. Even when there is a little sticker shock when the cost of the loan is included, most people have already committed to the idea of getting the loan and when the whole process doesn’t include surprises, they will speak your praises.
How Much is a $10,000 Loan Over 5 Years? (Getting Down to Brass Tacks)
Let’s use a simple amount, like $10k. Maybe this is for work equipment, a bridge loan, or because your truck died along with your dream of an easy go of things. Over 5 years, the cost comes down primarily to your interest rate which, in turn, depends on your credit, collateral, and how easy you are to work with.
If we go with a mid-range industry interest rate of 8%, amortized over 5 years (60 payments), you’d be looking at a monthly payment of $203. Not so bad, right? But the cost of that $10k over 5 years is going to run you $12,180 in that scenario. So you need to budget for an extra $2,180 in your initial plans for interest alone. Add in taxes and fees, and it’s even higher. Informed planning is how you keep the stress out of your life.
If you apply that same math to a $400,000 mortgage, the numbers get a lot more real, so if you can budget to pay it off faster, the savings will be substantial. And if you stretch out the payment, total interest paid will skyrocket. You never want to get into a situation where the money runs out, so making sure you plan the total loan repayment will make your life so much easier.
For brokers, the easiest way to explain this to your client is with a $10k example. You can run it with different rates, such as 6% over 5 years equalling $193 a month for a total interest payment of $1,600. Or 12% for monthly payments jump to $222 for a total interest payment of $3,300. By presenting a variety of scenarios, your client can plan their life around the decisions they make with you, and being asked the question “Do you want lower payments now or less total interest later?” When you lay out the trade-off visually, you get to be the hero who had their back. And make sure you let them know that commercial loans often have shorter amortization than residential loans, which means that 5 year term might be the full loan, not just the first term. Brokers can be teachers, and learned clients are the best clients.
What Income Do You Need for a $400,000 Loan? (The Number Nobody Wants to Hear)
The big ticket question isn’t the million dollar one, but the $400,000 one. Honestly, we just picked that number because it’s super common in our experience, and has a nice ring to it. For a Canadian real estate investor, it’s pretty much the entry-level requirement, and the income required is not a fixed answer, so here is some rough math.
From a borrower standpoint, lenders generally want your total monthly housing costs, including principal, interest, taxes, and heat, (P.I.T.H payments) to be no more than 39% of your gross monthly income. We call that the GDS, aka Gross Debt Service ratio. Plus, your lender will also want your total monthly debts, including things like car loans, credit cards, and any other financial obligations, to be no more than 44% of your gross income. This gives your TDS, aka Total Debt Service ratio.
So, for a loan of $400,000 at the low low rate of 5% over 25 years, your monthly principal and interest payment is roughly $2,338. Now, add $400 for taxes and $100 for heat, and this brings you to $2,838/month. To make sure that this is less than 39% of your gross monthly income is going to be the goal to increase your chances to secure that loan. That means you bring in about $7,277, or $87,300 a year. That assumes no other debts, of course. If you include a $500 monthly car payment and $300 credit card minimum, you need to be bringing in closer to $100,000 a year gross. This is why your broker asks about all your financial comings and goings. It’s not nosy, it’s math.
As a broker, you know that this $400,000 example is super clean, but no client is that cut and dried. Factor in child support, alimony, line of credit, and that side hustle that is off the books and under the table, so probing questions up front is about safety just as much for you as it is for them. And don’t forget to remind that commercial loans use different ratios, with stricter guidelines based on property income rather than personal income. By presenting an honest picture, you can better advocate for your client within the lender’s guidelines.
How Much Loan Can I Qualify For on a $70,000 Salary? (The Inverse Question, Answered)
On the lower income side of the coin, and starting with the income to determine the maximum loan amount, presents a more accurate picture of where a client is coming from. They know what they make, just not how much they can spend, and are looking for a range to work with.
As a borrower, you can estimate by using the same 39% GDS rule and apply it to your gross annual salary of $70,000. Simply divide it by 12 to get roughly $5,833 per month, then multiply it by 0.39 to get your maximum monthly housing cost of roughly $2,275. Subtract the estimated taxes of $400 and heating bill of $100, that would leave you with $1,775 for principal and interest. At a 5% interest rate over 25 years (and keeping that salary stable or better throughout that time), you can afford a loan of roughly $305,000. That gives you a ballpark to see if it meets with your repayment appetite. This is purely a hypothetical, and we do not make any guarantees, the math is the most common way to go into a meeting with your broker without feeling blind to the scope they care about when taking you on as a client.
From the broker’s perspective, this inverse calculation is where you show your caliber. You know full well that a client with a salary of $70,000 with no other debt is completely different than a client with that same salary, two car loans, a line of credit, and a timeshare in Florida. That’s why we run the TDS calculation every time. And be wary of clients who want to use overtime, annual bonus, or commissions to max out their gross, because those things are not guaranteed ever.
And if it’s a commercial client, property income matters more than personal salary. A $70,000 salary with a $100,000 commercial property that rents for $3,000 a month is a stronger file than the salary alone suggests.
It’s always a calculation, with principal plus interest plus taxes plus fees plus breathing room so you’re not paycheque to paycheque with no safety net. Now you know.
TL;DR: Glasslake’s One-Minute Version
- Know your terms. Principal is what you borrow, interest is the fee you pay for borrowing it, balance is what you still owe (including unpaid interest), and taxes and fees are part of it.
- A $10,000 loan over 5 years at 8% interest costs you roughly $203 per month, but you will pay back about $12,180 total, meaning nearly $2,200 of that is pure interest.
- For a $400,000 loan at 5% over 25 years, you need roughly $87,300 annual income with no other debt. Otherwise, it goes up.
- On a $70,000 salary with no other debts, you likely qualify for around $305,000 for a mortgage. That does not mean you should borrow the maximum.
- Do the math honestly, and do not lie about your income. And leave some breathing room.
With all our content, we aim to provide information to better understand the mortgage landscape for both brokers and borrowers. But every situation is unique, so feel free to reach out to us, and we can walk through your specific circumstances to see if there’s a fit for working together. Let’s make a deal.
Contact sales@glasslake.ca to learn more.
