How Much Home Can You Afford?
Learn the rules before you step up to the plate
By Mark Salerno - New Dream Homes and Condos
There are always a number of financial considerations above and beyond the purchase price of a new house that may be hidden, forgotten or simply overlooked, but which still need to be taken into account when you’re calculating exactly how much home you can afford.
To help make your calculations a little easier, we have developed an easy-to-use Mortgage Calculator, available on our website here. In general, however, there are a few “rules of thumb” you can use to estimate the maximum house price you can afford, the maximum mortgage amount you can afford to borrow, and the monthly mortgage payments that are right for your budget.
The first rule of affordability is that your monthly housing costs shouldn’t exceed 32% of your gross monthly household income. This includes your mortgage principal and interest payments, taxes and heating expenses (or P.I.T.H. for short), as well as half of your monthly condo fees and entire annual site lease amount, if applicable.
Second, your total monthly debt load shouldn’t be any higher than 40% of your gross monthly income. This includes your housing costs, as well as such other debts as car payments, personal loans and credit cards.
Of course, even if you’re prepared to cover all your P.I.T.H. expenses, there are still a number of other one-time and ongoing costs you should make sure to factor into your calculations.
One potential additional expense is Mortgage Loan Insurance. Many Canadians either do not have, or have made the financial decision not to provide, a down payment of 25% or more. By insuring lenders against default, Mortgage Loan Insurance allows you to buy a home with a high-ratio mortgage for as little as 5% down. Your lender or mortgage broker will calculate the applicable Mortgage Loan Insurance premium amount for you.
Once you own the home, general maintenance may come along faster – and cost more – than you expect. You may want to consider setting up a separate maintenance fund of $500 to $1,000 and then add to it regularly to cover the inevitable costs of future repairs or replacement.
Finally, plan to set aside at least 1% of the purchase price of the home to cover the other closing costs you may incur. These can include legal fees, GST and PST, land transfer taxes, survey and home inspection fees, water quality and Estoppel certificate fees, appraisal fees, mortgage broker’s fees, moving expenses and service hook-up fees.
For a complete list of homebuying costs, order your free copy of CMHC’s Homebuying Step By Step consumer guide and workbook by calling CMHC at 1-800-668-2642 or visit www.cmhc.ca.
Mark Salerno is District Manager for the Greater Toronto Area at the Canada Mortgage and Housing Corporation. For over 60 years, Canada Mortgage and Housing Corporation (CMHC) has been Canada’s national housing agency, and a source of objective, reliable housing expertise.
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