Projected income for early career physicians purchasing a home

Thinking about buying a home but don’t know how much you can afford?  Here’s what you should consider when getting a mortgage.

For many early career physicians, as your income starts to increase, the excitement of being a homeowner becomes a reality.  As you save for home ownership, you will need to figure out how much you can comfortably afford in monthly mortgage payments. Buying a home is one of the biggest purchases you will make so it is important to understand the costs and what mortgage options are available to help guide your home buying decision. 

You might be relocating for your residency, fellowship, or to start practising, and scouting for that perfect house. Most likely, you will need to borrow money to buy your home. Although you are earning a modest salary now, your earning potential is likely to continue to increase in the coming years. You will want expert advice and a mortgage solution that will take your unique financial needs as a physician into account. 

To put it simply, a mortgage is a type of loan that you borrow from a bank, credit union or private lender and it is used to buy a home or another property. It’s a legally binding contract between you and the lender you choose. Some of the key elements to be aware of are your payment schedule, the duration of your term, and the interest rate you’re paying. 

Through the Scotiabank Healthcare+ Physician Banking Program  you have access to tailored advice and solutions to help you achieve your goal of becoming a homeowner. The program offers mortgage solutions specifically designed to help new medical doctors buy their first home. Some of the program features include:

1. Medical residents, fellows, and physicians in their first three years of practice can apply for a mortgage based on their projected future income¹, so we can account for your changing circumstances as you transition to practice. 
2. Scotiabank uses a debt-to-income ratio when qualifying customers for a mortgage, taking into account your obligations to repay student loans so you do not overextend yourself. 
3. Physician customers get preferred Scotiabank interest rates on their mortgage and line of credit to help save you money.

The Scotiabank Healthcare+ Physician Banking Program has a mortgage option that qualifies medical residents, fellows, and physicians in their first two years of practice based on their projected future income rather than their current income. The allowable projected income used for qualification purposes depends on your medical professional specialization and how far you are in your training.  For example, if you are a new-to-practice neurosurgeon you may qualify for more than a first-year resident physician:

Sample Career Stage Qualification income

• Residents first or second year $185,000  
• Residents at least in third year $225,000  
• New-to-practice Family Medicine $225,000  
• New-to-practice Neurosurgery $300,000  

To determine how much of a home loan you qualify for, you will need to go through a pre-approval process that includes reviewing your credit score, credit history, current income, projected income, assets, debts, and down payment. Scotiabank will calculate your total debt-to-service ratio (TDSR) to assure you can afford to make your mortgage payments. This ratio will calculate how much income you need to cover your housing costs, including mortgage, property taxes, insurance premiums and heating, as well as any debt you owe including student loans, lines of credit or credit cards. It is similar to a debt-to-income ratio, which tallies your amounts owing versus your salary. 

To buy a home in Canada, you need to have at least 5% of the purchase price to put down, the remaining amount you can borrow from a lender. For instance, if the home is $500,000, you’re required to pay $25,000 of your own money. 

As the sale price goes up, so does the percentage you need to put down. For homes above $500,000, the requirement is 5% on the first $500,000 and 10% on the amount above that. When homes hit $1 million, the down payment requirement goes up to 20%. 

With homes under $1 million, you have the flexibility of putting down 5% or more, but if you have 20% to put towards buying a home it’s generally advised to do so as you’ll avoid paying for mortgage default insurance. This insurance essentially protects your lender in case you default on your mortgage and gives them the confidence to provide a loan to you with a smaller down payment. Wondering how much it will cost you? It will be calculated based on a percentage of your mortgage and the size of your down payment. The one-time premium is added to your mortgage, and it ranges from 0.6% to 4.5% of the amount of your home loan.  It usually amounts to an extra $100-$200 a month and can be added to your mortgage payment. 

Your mortgage interest rate is the fee you will pay to the lender in exchange for borrowing money. The higher your interest rate, the more expensive your monthly payments will be.  For example, let's say you need a $500,000 mortgage and the interest rate is 3%. Your monthly payment would be $2,366 on a 25-year amortization (the time it takes to pay off the mortgage). However, if the interest rate was 4%, your monthly payment would be $2,630. That scenario would mean you would have to pay an additional $264 each month.

Interest rates vary based on the lender, your credit score, length of your mortgage term and the type of interest rate (e.g., fixed versus variable).  When determining what is the right mortgage option for you, you will need to decide between a fixed and variable rate. Each has its own pros and cons, so it is important to understand how each one works to make the best decision for you.

With a fixed rate mortgage, your interest payments stay the same for the entire term of your mortgage loan, which is usually 5 years.  Interest rates may be higher on a fixed rate mortgage compared to a variable rate mortgage, but it is easier to manage payments as they remain fixed, and it gives you the security of knowing what your payments are for the full term of your mortgage.

With a variable rate mortgage, your interest rate and payment amount can go up or down throughout the term of your home loan as the Bank of Canada adjusts its interest rates. This can happen a few times a year or rates can remain the same for long periods. The advantage of a variable rate mortgage is that your interest rate can be lower than a fixed rate mortgage, which can create potential savings but requires a certain risk tolerance. Check out our article on What interest rate hikes mean for your mortgage to learn more.

The length of time it takes to pay off your mortgage in full based on regular payments at a set interest rate is called the amortization period. A shorter amortization period will result in higher mortgage payment with less money paid in interest. A longer amortization period means you’ll pay lower monthly payment but more interest.

In Canada, regular amortization periods are 15, 20, and 25 years. A 30-year amortization is available for mortgages without default insurance. If you require mortgage default insurance, 25-years is the most you will qualify for.

A mortgage term is the length of time for which the interest rate, payment and other conditions are set. These typically range from 6 months to 10 years. When the term has ended, mortgage loans are due and payable unless it’s renewed.

The pre-approval process allows you to gather information, including the maximum mortgage you qualify for, and an estimate of your mortgage payments. Then, when you go house hunting, you know what you can afford from the outset. When the housing market is competitive with bids for homes coming fast from multiple potential buyers, pre-approval gives you the advantage of being able to close a sale quickly. Scotiabank offers pre-approvals that last up to four months. 

The cost of a home doesn’t stop with your winning bid on the listed price. To prevent last-minute snags or even being sued by the home seller if you have to pull out, it is best to make allowances for the other fees and expenses you will need to pay to close the deal. These include mandatory closing costs required by provincial and municipal governments such as land transfer taxes. They can add tens of thousands of dollars to your total cost depending on where you are home buying and the property’s selling price. 

Other closing costs can include appraisal fees to see if the real estate is properly valued, lawyer fees for title and deed searches, and sales commissions to real estate agents. You should also consider a home inspection by a reputable firm to find any potential problems in construction and maintenance in addition to any disclosures from the seller before buying. It could save you thousands of dollars in repairs. 

Before becoming a homeowner, you should speak with a Scotiabank Advisor or MD Financial Management Advisor* to discuss how purchasing real estate fits into your overall financial plan. If you do not have a financial plan, now is a great time to build one as you do not want to move into a house that will stretch you too far financially. What loan amount you can be approved for and what you can afford are two different questions you need to answer. If you are pre-approved for a mortgage based on your projected income, you still need to determine what you can comfortably afford on your current salary as you retire any student loans or medical school costs. You will want to ensure that you can still afford your necessities, while being able to relax and do the things you enjoy with your friends and family during your down time .  Having a financial plan and the right advice will save you from costly mistakes and give you peace of mind with making the biggest purchase of your life.

Home buying is complicated.  A Scotiabank Advisor can explain all options and help you determine the right mortgage solution for you.