If the time is right for you to buy a home – especially if it’s your first home – it can be very exciting. However, home ownership also comes with greater financial responsibility and certain stresses, including home maintenance and additional costs. It’s important to know exactly how much you can afford to pay for a house to avoid any surprises.
Determining how much home you can afford starts with a serious assessment of your net worth – the amount left over once you subtract your liabilities from your assets. Knowing your net worth is important when you discuss your mortgage options with your lender.
To calculate your net worth, you will need to look at your current monthly expenses and your monthly debt payments as well as your assets, including property, vehicles you own, savings, RRSPs and other assets. This information will provide a snapshot of your current financial situation and indicate how much you can afford for a down payment.
Once you have a clear picture of your financial situation, it’s time to find out what you can afford in monthly housing costs. The maximum home price you can afford will depend on a number of factors, but the most important are your gross household income, your down payment and the mortgage interest rate.
Lenders follow two simple affordability rules to determine how much you can pay. The first is that your monthly housing costs shouldn’t be more than 32% of your gross household monthly income. The second is that your entire monthly debt load shouldn’t be more than 40% of your gross monthly income. This includes housing costs and other debts such as car loans and credit card payments.
Help is available
For most people, the hardest part of buying their first home is saving the down payment. Many people will not have 20% of the purchase price to put down. With mortgage loan insurance, you can purchase a home with a minimum down payment of 5%.
Mortgage loan insurance protects the lender, and by law, most Canadian lending institutions require it. The way it works is if the borrower defaults (fails to pay) on the mortgage, the lender is paid back by the insurer. The cost for this type of insurance is in the form of a premium and can be paid in a single lump sum or can be added to your mortgage and included in your monthly payments.
Most mortgage loan insurance products require homebuyers to provide the down payment from their own resources, such as savings and RRSPs. Gift down payments from immediate relatives are also acceptable.
For down payments of less than 10%, CMHC enables lenders to offer homebuyers the flexibility to use additional sources of down payment, such as borrowed funds or lender incentives.
There’s a lot to know about buying your first home. Fortunately, there is a lot of information available to help you through the home-buying process. Visit CMHC’s website and search “home buying” to access worksheets and online publications such as “Home Buying Step-by-Step.” You can also call our toll-free number at 1-800-668-2642 to order this and other publications.
Mark Salerno is district manager for the Greater Toronto Area at the Canada Mortgage and Housing Corporation. You can reach him at 416-218-3479 or msalerno@cmhc.ca.
