Buying a house can be a strange mix of excitement and nervousness, especially when house prices are relatively high. For most people, thoughts of home ownership begin in earnest when you have a down payment and a steady household income. Perhaps your family is also growing.
When the time feels right, usually when you’re spending a lot of spare time looking at house listings, the big question then becomes: “How much house can we actually afford?”
In this guide, we aim to help you answer that question without bamboozling you with financial jargon. We look at the tools available, like mortgage calculators, and important considerations that can help you come up with a realistic number that factors in childcare, car payments, groceries, utilities and everything else your family spends money on.
Instead of starting with real estate listings and working backward to see what you can afford, consider establishing how much house and mortgage you can afford and taking it from there.
How much mortgage can you qualify for?
Mortgage lenders like credit unions look at a variety of things when figuring out how much you can afford, including:
- Your income
- Predicted housing costs
- Your other debts
According to the Financial Consumer Agency of Canada (FCAC), your monthly housing costs shouldn’t be more than 39% of your gross (pre-tax) household income. This includes your mortgage payment, property taxes, heating and 50% of any condo fees. If you include other debts, such as car loans, credit cards and student loans, the guideline rises to 44% of your income.
So, if your monthly pre-tax household income is $13,000, you should be aiming for housing costs of between $5,070 and $5,720 a month.
Typically, you’ll also need to pass a mortgage stress test. This checks whether you could still afford your mortgage if interest rates rise during period of the mortgage.
A mortgage calculator can be a big help here to help you understand your options and play around with some numbers, rather than make any decisions for you. YNCU’s Mortgage Planning Calculator can give you an initial idea of how much you can borrow and what your payments might look like. Meeting with an advisor can also be a big help at this stage.
“Instead of starting with real estate listings and working backward to see what you can afford, consider establishing how much house and mortgage you can afford and taking it from there.”
Mortgage approval and comfortable affordability aren't the same thing
It’s important to remember that how much you can borrow isn't automatically how much you should borrow. Your mortgage lender may not have a full picture of your other monthly spending.
For example, maybe you want to keep contributing $500 a month to your TFSAs or an RESP or two. You might have children in daycare, need two vehicles for work or want to be able to take bigger family vacations every year or so.
This is where a mortgage calculator can’t help. It’s up to you, with or without a financial advisor, to figure out how much you can realistically afford to spend on a home.
The main question to ask is: “What would our finances look like every month if we bought this home for this amount?”
Example: Same income, very different budgets
Consider two Ontario families each earning a combined $150,000 a year. One family has one vehicle payment, relatively modest childcare costs and a decent amount in emergency savings. The other household earns exactly the same amount but has two vehicle payments totalingling $1,200 a month, higher childcare costs and a line-of-credit balance.
With the same incomes they might qualify to borrow similar amounts. However, that doesn’t mean they can afford the same mortgage.
What should you include in your home budget?
When crunching your overall numbers, start with the mortgage payment as probably the biggest monthly expense, then include other existing expenses plus new home ownership-related costs such as:
- Property taxes
- Home insurance
- Heating, electricity and water
- Condo or maintenance fees
- Repairs and maintenance
- Larger occasional expenses such as replacing a furnace, roof or appliances
When you factor in some of the other costs of home ownership, you get a bigger picture of how much you should really borrow for the mortgage payment. Take that number and add it to your existing household budget to get a clearer picture of what you can borrow for a home.
What if your household income changes?
Another important piece of the puzzle is not to just look at what you can afford today. Think about any changes that might happen over the next few years, especially if you're planning a family planning a leave of absence from work.
Example: What happens if one income drops?
A software developer earns $105,000 and their partner, a paramedic, earns $80,000. Their combined $185,000 income gives them a healthy budget for buying a home. However, the planned arrival of a second child will see one parent expects take longer parental leave, followed by several years of childcare costs.
Instead of looking only at what they can afford on $185,000 today, they predict how their income and expenses will look in a few years and run those numbers as well. While that may reduce their home-buying budget right now, they would be able to manage the big change in circumstances coming down the road.
How does your down payment affect what you can afford?
Your down payment affects not only affects how much you need to borrow, but also what your monthly mortgage payment will be. Simply put, the more you put down, the smaller your mortgage—and generally the less interest you'll pay over time.
Your down payment can also affect other costs. If your down payment is less than 20% of the purchase price, you'll typically need mortgage loan insurance. If the insurance premium is added to your mortgage, it increases the amount you have to repay.
In other words, a larger down payment could help make a more expensive home affordable without bringing down monthly mortgage costs, or reduce the monthly payments on a less expensive home.
Remember the costs involved in buying a home above and beyond your down payment. You'll also need money to pay legal and other fees and physically move into the home. The FCAC recommends budgeting for about 1.5% to 4% of the purchase price for upfront and closing costs. For a home that costs $700,000 to buy, that's roughly an extra $10,500 to $28,000.
What closing costs should Ontario homebuyers expect?
In Ontario, your closing costs could include:
- Legal fees
- Home inspection
- Title insurance
- Property tax adjustments
- Moving expenses
- Ontario Land Transfer Tax
If you’re a first-time home buyer in Ontario, you may qualify for a refund of some or all of the provincial Land Transfer Tax. This can save you up to $4,000.
How does this look in practice? If you have $100,000 available to buy a home, don't just think think of it as your down payment. Figuring out your closing and other costs and subtracting those could help you come up with a more realistic down payment amount.
“If possible, don’t put all of your savings into buying a home. It’s still good to have a cushion should something unexpected happen.”
Should you keep an emergency fund after buying?
Ideally, everyone—no matter their income or financial situation—should have an emergency fund. Arguably, it matters even more when you become a home owner. A furnace can stop working, your basement can leak, your roof needs repairing… On top of those scenarios you also have your usual potential “emergencies, such as a drop in income, a health issue or your car breaking down.
If possible, don’t put all of your savings into buying a home. It’s still good to have a cushion should something unexpected happen. And if you're still building your down payment and emergency savings from your first professional salary, see How much of your paycheque should you save? A guide to your first real salary.
As well as maintaining your emergency fund, you should consider your other financial goals and circumstances when thinking about how much home you can afford. For example:
- Would you have to stop saving for retirement?
- Would a major expense need to go on a line of credit?
- Would you need to work extra hours for overtime to make your mortgage payments?
- Could you still grow your family and achieve other life goals?
Buying too much house could see your finances stretched to the point that you have to give up other goals.
Example: What if the overtime disappears?
In a one-income household, an electrician earns $90,000 in base salary but regularly makes another $15,000 through overtime. That extra income makes a larger mortgage look manageable, until the couple factors in what happens if it stops. So they also calculate what the mortgage would look like on only the electrician's regular salary to come up with a more realistic amount.
If overtime is a big part of your household income, take a look at How is overtime taxed in Canada? And what should you do with the extra pay?
Next steps: Start with the calculator, then test the real-life numbers
Instead of starting with real estate listings, use YNCU’s Mortgage Planning Calculator to first help you estimate your mortgage payments and compare different mortgage amounts, rates and payment options.
Then take that number and plug it into your actual current household budget (including existing expenses such as childcare, vehicle payments, debt repayments etc.). After that, add the costs of home ownership, such as property taxes, utilities, insurance and maintenance.
Finally, take this number and test some realistic “what if” scenarios. For example, what if:
- One parent takes parental leave?
- Childcare costs increase?
- Overtime drops?
- You get a major home or other unexpected expense?
Your goal is to land on a number of how much house and mortgage you can afford, while still being able to cover your household expenses and put money toward other life and financial goals.
Armed with this knowledge, you can browse home listings and turn up for open houses with a much better idea of which homes are realistically within your reach.
Common questions about buying a house in Canada
How much of my income should go toward housing in Canada?
FCAC says total monthly housing costs generally shouldn’t be more than 39% of gross household income. Total debts, including housing costs, generally shouldn’t exceed 44%. However, your own comfortable limit may be different.
Does mortgage preapproval mean I can afford that amount?
Preapproval only tells you how much a lender might lend you. You also need to factor in budget childcare, vehicles, savings and other household costs and goals.
How much should I budget for closing costs?
FCAC recommends budgeting for about 1.5% to 4% of the home's purchase price.
Should I put all my savings into the down payment?
You should also factor in money for closing costs, as well as having some money left over for other savings goals and emergency savings.
