How Much House Can I Afford?
Learn about the calculations and factors that go into affording your dream home.
By Emily Southey | 12 minute read
If you’re a first-time homebuyer, then you’re probably wondering how much house you can afford. Since a home is one of the biggest purchases you will ever make, determining how much you can afford to spend is a crucial part of the homebuying process. To calculate your homebuying budget and learn more about the factors affecting affordability, keep reading.
Factors That Impact How Much House You Can Afford
Many factors impact how much you can afford to spend on a new home, from your gross household income to your debt-to-income ratio. We break down each of these factors below.
Gross household income
The first step in calculating home affordability is adding up your gross household income. This is the total income (or combined income if you are buying a home with a partner) that you can use to qualify for a mortgage loan. Gross household income encompasses all streams of income, including employment income, child tax credit, pension, business income, and disability benefits. If you are buying a home with someone else, be sure to calculate their annual household income and add that to yours. Please note that gross household income is the total income before taxes.
“Generally speaking, financial planners recommend that first-time homebuyers follow the 28/36% rule. This translates to spending no more than 28% of your gross monthly income on mortgage payments and no more than 36% on total debt.”
The next factor impacting how much you can afford for a house is your debt-to-income ratio (DTI). Mortgage lenders will always assess your debt-to-income ratio when deciding whether to approve you for a mortgage, as DTI is a direct indicator of risk level. The higher your DTI, the riskier you look, and the less likely it is that they will approve you (or if a lender does approve you, it might be at a high interest rate or for a lower amount). This directly impacts your homebuying budget.
To calculate your current DTI, add up your monthly debt (for example, phone bills, rent payments, etc.) and divide it by your gross monthly income (calculated in the step above). Be sure to account for all debt, including student loans, car loans, and credit card payments. Generally speaking, traditional mortgage lenders prefer to see DTI ratios under 43%. Some even have a 50% cut-off, meaning if your DTI is above 50%, they will not approve you for a mortgage, and you may need to consider a subprime or B lender.
A third factor impacting home affordability is your credit score. This is because credit scores are assessed by mortgage lenders to determine your mortgage rate. The higher your credit score, the better off you will be. Credit scores range from excellent to bad. Though the exact scores vary by financial institution, this list gives you a general idea of each credit score category:
- Excellent: Credit scores between 760–900
- Very good: Credit scores between 725–759
- Good: Credit scores between 660–724
- Fair: Credit scores between 560–659
- Bad: Credit scores below 560
Please note that most traditional mortgage lenders won’t approve homebuyers who have scores below 600. So if you have bad credit, you will need to delay the homebuying process while you work to improve it or obtain a bad credit mortgage from a private or subprime lender. Alternatively, if you have a high credit score of 725 or above, you could be approved for a better mortgage rating, saving you hundreds of dollars in monthly mortgage payments.
Canadians can check their credit scores via Equifax Canada, RateHub, Borrowell, and TransUnion Canada, or through their financial institution (some Canadian banks allow their clients to check their credit scores for free). Equifax Canada also offers free credit checks to Canadians.
Another factor affecting home affordability in Canada is the down payment. This is a future expense you will need to pay if you go through with purchasing a home. In Canada, no matter where you live, you are required to make a down payment when you buy a property. Down payments are most often paid by the buyer in cash but they may also be covered by a mortgage loan or a combination of cash and a loan. The minimum down payment a Canadian homebuyer can make is 5% of the purchase price. However, down payments may be as high as 20% (or even 25% if you’re purchasing a new build home or pre-construction condo). It should be noted that if your down payment is less than 20%, most mortgage lenders will require you to purchase mortgage loan insurance, which is yet another expense impacting home affordability.
The down payment you are prepared to make directly impacts how much a mortgage lender will loan you, which also affects how much house you can afford. Typically, the higher the down payment, the better the loan terms. To determine how much of a down payment you can afford to make, examine your savings and consider the amount you would be comfortable allocating to a down payment.
Monthly mortgage payments
For most buyers, the greatest expense associated with buying a home are the monthly mortgage payments. Calculating how much you can afford to spend on monthly mortgage payments is crucial to determining overall affordability. When it comes to mortgage payments, financial experts recommend following the 28/36% rule. This means spending no more than 28% of your gross monthly income on mortgage payments and no more than 36% on total debt. For example, if you choose to follow the 28/36% rule and you earn $5,000 each month, your monthly mortgage payment should be no more than $1,400 (28% of $5,000), while your monthly debts should add up to a maximum of $1,800 (36% of $5,000). The money leftover should go toward other essentials, like food and transportation; savings goals, such as a college fund for your child or retirement; and “fun” expenses, such as dining out. Ultimately, when deciding how much house you can afford, calculating your projected monthly mortgage payments is critical. You must understand the line between what you can technically afford to spend and what is feasible in reality. After all, you still want to be able to live comfortably each month after making your mortgage payment. If you allocate too much of your monthly income to your mortgage payment, you might not have enough to cover basic necessities or build on your savings.
Property taxes and closing costs
Two final factors to consider when figuring out how much house you can afford are the property taxes and closing costs. All real estate transactions in Canada come with property taxes and closing costs, both of which the buyer is responsible for paying. Property taxes vary depending on which province or municipality you live in. For example, in Toronto, all home purchases are subject to both a provincial and a municipal land transfer tax. In addition to these hefty taxes, homebuyers will need to budget for upfront closing costs, like legal and administrative fees, sales tax, home inspection fees, mortgage default insurance fees, and more.
Mortgage Affordability Calculators
Unless you’re buying a house with cash, most Canadians need to take out mortgages to finance their homes. Therefore, home affordability ultimately comes down to how much a mortgage lender will loan you. All of the factors listed above will be assessed by a lender when you apply for a mortgage. However, before ever contacting a lender, you might be curious as to how much they are likely to approve you for. That’s what mortgage affordability calculators are for. They are free, easily accessible online, and can calculate your maximum affordability in just minutes (especially if you already know key factors, like your gross household income and DTI).
Mortgage affordability calculators may require different information depending on the website you use. However, most will ask for your gross annual income (before tax), your down payment amount, the location of your future home, your debt payments (credit card payments, car payments, etc.), and other living costs associated with your home (for example, property taxes). Once you’ve entered this information, the calculator will work its magic and present you with your maximum home price. Some even go into greater detail, providing you with metrics like your estimated monthly expenses, the amount of cash needed, and your predicted monthly mortgage payments.
While a mortgage affordability calculator can be an extremely useful tool in figuring out how much house you can afford, it’s only a first step. Should you decide to proceed with the homebuying process, be sure to contact a mortgage lender (or multiple) and get pre-approved for a mortgage by providing more information and documentation about yourself and your finances. Before you apply for mortgage pre-approval, gather the necessary documents, such as your proof of assets, proof of income/employment, personal identification, and those showing any debt or financial obligations.
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Tips for Improving Home Affordability
If you calculated your home affordability and weren’t happy with the outcome, fear not. There are ways to increase how much you can afford to spend on a home. We’ve put together our top tips for improving home affordability below.
- Boost your credit score: As mentioned above, a credit score is one of the main factors mortgage lenders use to determine your mortgage rates. Therefore, boosting your credit score is one way to lower your mortgage rate and increase your affordability. To improve your credit score, aim to make all loan payments on time and in full, pay down any and all debt that is feasible, keep your credit utilization ratio below 30%, and avoid applying for any new credit at this time.
- Improve your debt-to-income ratio: Reducing your DTI is another way to increase your homebuying budget. To do this, you might consider refinancing your loans (such as your student loans) to a lower interest rate. You could also try to increase the size of your income by negotiating a pay raise at work or getting a second job.
- Save up for a bigger down payment: The more money you can pay upfront, the less you will need to borrow from a lender. So if you can make a larger down payment, (closer to 20% than 5%), a lender is more likely to approve you for a lower rate.
- Consider medium or small cities: Housing prices vary considerably across Canada. Just because you can barely afford a one-bedroom condo in Toronto doesn’t mean it will be the same in a different part of the country. If buying a home is a top priority but you’re struggling to afford something in your dream neighbourhood or city, we recommend casting a wider net. There are plenty of cheap places to buy homes in Ontario, from Windsor and Barrie to Ajax and Guelph. You might be able to vastly increase your affordability just by considering other regions.
- Determine how much space you need: Just because your dream has always been to own a five-bedroom home doesn’t mean that now is the time. If you live alone or it’s just you and your partner, maybe you don’t need 3,500 square feet and a backyard with a pool. Consider what you need to be happy right now. If you’re years away from starting a family, a smaller starter home or even a spacious condominium might be a great decision for your wallet and lifestyle. Smaller homes are often far less expensive to buy than oversized single-family dwellings.
- Take advantage of homebuyer incentives: One final way to improve home affordability is by taking advantage of homebuyer incentives. The federal and provincial governments in Canada offer a wide range of assistance programs aimed at first-time homebuyers. For example, there is the Shared Equity Interest Program, Home Buyers’ Plan, Home Buyers’ Tax Credit, Ontario First-Time Home Buyer Incentive, and the Toronto First-Time Home Buyer Incentive. When calculating your affordability, be sure to research the incentives out there or seek advice from a mortgage broker.
Frequently Asked Questions
How much can I afford as a first-time homebuyer?
To determine how much you can afford to spend on a home as a first-time homebuyer, you will need to calculate your mortgage affordability. Your mortgage affordability takes into account several factors, including your gross household income, debt-to-income ratio, down payment, and more. Mortgage affordability calculators are free to use and offer an estimated amount you can afford to spend on a home.
Generally speaking, financial planners recommend that first-time homebuyers follow the 28/36% rule. This translates to spending no more than 28% of your gross monthly income on mortgage payments and no more than 36% on total debt. Therefore, to determine how much you can afford, figure out what 28% of your monthly gross income is. This is the maximum amount you should ideally have to put toward your monthly mortgage payment.
What are the most important factors that impact how much house I can afford?
Determining how much money you can afford to spend on a house comes down to a few key factors, including your gross household income (how much money you earn), your debt-to-income ratio (how much money you’re spending on other debts relative to your earnings), and how much you can put toward a down payment (based on your savings). Mortgage lenders will assess these factors to determine your risk level and how much money they should lend you accordingly. The higher your household income, the lower your debt-to-income ratio, and the more money you can put toward a down payment, the better.
What are the upfront costs of buying a home?
The upfront costs of buying a home include the down payment, earnest money deposit, property taxes, and closing costs. Down payments vary and are dependent on the purchase price of the home but typically range between 5% and 20% of the purchase price. Property taxes also vary according to which province/territory or municipality you reside in. For example, Toronto home purchases are subject to both a provincial and municipal land transfer tax (though there are rebates available to first-time homebuyers through the respective Ontario First-Time Home Buyer Incentive and Toronto First-Time Home Buyer Incentive programs). Meanwhile, closing costs, which include everything from legal fees to administrative fees, can fall anywhere between 1.5% and 5% of the purchase price. All of the aforementioned upfront costs are usually paid in cash by the buyer.
Do I qualify for a homebuyer incentive program?
The answer to this is it depends. There are many homebuyer incentives available to Canadians, though many are designed for first-time homebuyers. Therefore, whether you qualify for them will depend on if you have purchased a property in Canada before. Each assistance program has a unique set of eligibility requirements, which is why we recommend researching the specific incentive you’re interested in to determine whether you qualify. For example, the Toronto First-Time Home Buyer Incentive is exclusively available to people who buy homes in the municipality of Toronto.
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