Can you afford to buy a home?

Couple looking at new home

For most people, buying their first home is the biggest purchase they will ever make. While home ownership often comes with more responsibilities than renting, its rewards can also outweigh the challenges.

Financially, owning real estate can help you build a strong credit history and develop your net worth as you pay down your mortgage and your house appreciates in value. While renting remains an ongoing expense, owning your home can play a big part in your retirement plan as it lowers housing costs considerably once your mortgage is paid in full. 

How much can you afford?

It goes without saying that the more expensive the house, the higher your monthly mortgage payments will be, which will have a significant impact on your monthly expenses.

Lenders use two key numbers to determine a maximum purchase price that will still allow you to meet your other financial obligations:

  • Gross debt-to-income service ratio (GDSR)
  • Total debt-to-income ratio (TDSR)

Your GDSR should not exceed 32% of your gross monthly income.

This means that your mortgage payment (principal and interest) + property taxes + heating costs must be less than 32% of what you make in gross income, before taxes and deductions, every month. If you’re buying a condo, you also need to include half your monthly condo fees.

You may be familiar with TDSR if you have applied for credit in the past.

Your TDSR takes into account not only your housing expenses (mortgage payment, property taxes and heating costs), but also all other debt obligations such as credit cards, lines of credit, loans and other debt payments. Most lenders will ensure that a house purchase will not push your TDSR to exceed 40% of your gross monthly income to ensure that you can continue to live comfortably.

It is also important to know that most lenders typically require two years of employment history in the same industry when calculating GDSR and TDSR to qualify you for a mortgage.  For self- employed and commission based earners, mortgage lenders may want more than two years. Stable and ongoing income is an important factor in being approved for a mortgage, but it is also important for your own peace of mind to ensure that you can meet your payment obligations over the life of your mortgage.

Do you have enough saved for upfront costs?

When people think about upfront costs for purchasing a home, the first thing that comes to mind is the down payment. At a minimum, you will need 5% of the purchase price of your home in cash as a down payment. If you want to avoid paying a High Ratio Mortgage Loan Insurance premium through CMHC, you will need a minimum of 20% of the purchase price as a down payment.

See our blog post Saving For a Down Payment for tips on how to grow your savings faster.

There are other costs to consider, such as:

  • Often you will need to pay an appraisal fee on your new property to qualify for your mortgage.
  • You will incur legal fees to register you as the new owner of the home.
  • One cost that is frequently overlooked is Land Transfer Tax. This tax is based on the fair market value of a property and is calculated on a sliding scale.

How will home ownership affect my expenses?

 Your monthly mortgage payment is just one aspect of the cost of home ownership. Other costs include property taxes, home insurance, and utilities such as heat and water. Depending on where you moved to, your transportation costs can also change dramatically.

One-time expenses to set up your new home can also add up quickly, including furniture, appliances, or even stocking your pantry for the first time.  One other area to consider is yard, with expenses ranging from necessities like a lawn mower to nice-to-haves like a BBQ and patio.

When budgeting for life as a homeowner, consider all facets of your life as a renter. How will they change once you move into a new home? Some aspects may be more affordable as a homeowner while others may not.  Whatever the case, a little planning can go a long way and will put you in a position to comfortably handle this new chapter in your life.

If you don’t know, just ask!

Obviously there is a lot to consider when you finally decide to take the plunge into home ownership. When starting to consider the home-buying process, it would be beneficial to meet with a Cambrian Lending Specialist to discuss your options and know what you can afford.  We can help you evaluate your financial situation and give you advice on the best way to prepare.  Then, when you're ready to take the leap, complete our new online mortgage application, which can be completed in as little as 15 minutes. 

Thinking about buying your first home? Check out our Mortgage Affordability Calculator to see what you can afford based on your current finances!