How much can I afford to pay for a home?

To get an idea of how much you can afford, you’ll need to know your taxable income, along with any outstanding debts and monthly payments.

First (for purchasing a principal residence) calculate 39% of your income for use toward a mortgage payment, property taxes and heating costs. If applicable, include half of estimated monthly condominium maintenance fees.

Next, make a second calculation, this time 44% of your taxable income. Then deduct all of your monthly debt payments, including car loans, credit cards, and line of credit payments.

The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing-related payments, including your mortgage payment. These calculations are based on lenders’ usual guidelines.

In addition to considering what the ratios say you can afford, we’ll help you determine exactly how much debt you’re comfortable servicing. If that amount is less than 39% of your income, you may want to settle for the lower amount rather than stretch yourself financially. Make sure you don’t leave yourself ‘house poor,’ with not enough funds to spend on other things, like vacations. Structure your payments so that you can still afford simple luxuries. You’ll also need to qualify for your mortgage amount, with new stress-test regulations released by the federal government.

Use the Mortgage Affordability Calculator –

What is the minimum down payment needed to purchase a home?

A minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions. Other situations, such as being self-employed or having poor credit may also impact the required down payment amount.

In addition to the down payment, you must also be able to show that you can cover any applicable closing costs, such as legal fees, disbursements, appraisal fees and a survey certificate, where applicable.

Regardless of the amount of the down payment, at least 5% of it must be from your own cash resources, or it can be in the form of a gift from a family member

Lenders will generally accept a gift from a family member as an acceptable down payment. In this case, the donor will need to provide a signed letter stating that it’s a true gift, not a loan.

Mortgages with less than 20% down must have mortgage loan insurance provided by either CMHC, Sagen or Canada Guaranty.

Use the Mortgage Affordability Calculator –

What is mortgage loan insurance?

Mortgage default insurance is legally required on mortgages with a Loan-to-Value (LTV) ratio greater than 80% (often called a high-ratio mortgage). It protects lenders against the risk of mortgage default and foreclosure by the borrower.

Usually paid by the borrower, the premiums for default insurance range from 0.50% to 7.0%. They can be added directly onto the mortgage amount or paid as a lump sum before the mortgage is advanced. This type of insurance is not the same as mortgage life insurance.

In Canada, mortgage default insurance is provided by three companies: Canada Mortgage and Housing Corporation (CMHC), Sagen and Canada Guaranty. CMHC is a Crown corporation, while the other two are approved private corporations.

What is a conventional mortgage?

A conventional mortgage is usually one where the down payment is equal to 20% or more of the purchase price, with a Loan-to-Value (LTV) of 80% or less. It typically does not require mortgage default insurance, and so the borrower does not have to pay these insurance premiums. Mortgage interest rates may be slightly higher, however, for lenders to offset the lack of default insurance.

Can I use gift funds as a down payment?

Most lenders will accept down payment funds that are a gift from the family. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. If mortgage default insurance is needed (with down payment less than 20%), the lender or insurance provider may require the gift money to be in the purchaser’s possession before the application is sent to them for approval.

What is a pre-approved mortgage?

A pre-approved mortgage is a solid idea of the maximum amount of mortgage that you qualify for, along with an interest rate guarantee from a lender for a specified period of time (usually 60 to 120 days). It’s usually one of the first steps a home buyer should take when looking for a home or property.

A pre-approval does not absolutely guarantee that you’ll receive the funds (as the final amount may be subject to conditions), but it’s a very good indicator of the maximum amount you should consider when looking to purchase.

Your pre-approval process requires that you provide financial and credit score information in order to determine what size of loan you’re eligible for, based on lender and government requirements and regulations. And, your down payment will be factored into the amount.

Most real estate agents prefer that you have a pre-approved mortgage in place before they take you out looking for a home or property. That way, they know they’re showing you the right properties within your affordable price range.

What is a down payment?

Very few Canadian homebuyers have the cash available to buy a property outright. Most of us will turn to a financial institution for a mortgage, which can be the first step in a potentially long-standing mortgage relationship. But even with a mortgage, you’ll first need to raise money for a down payment.

A down payment is the portion of the purchase price that you provide, which secures at least a small amount of equity in your home or property. It also indicates your financial commitment towards such a large purchase and resulting mortgage loan. The amount of your down payment should be determined well before you start house hunting, or before getting a pre-approval.

The larger the down payment you can provide, the less your home or property will cost in the long run. A smaller mortgage also means the potential for lower interest and insurance costs, which can add up to significant savings over the life of your loan.

Can I buy a home with as little as 5% down?

Yes, it’s possible to buy a home or property in Canada with a minimum of 5% down (subject to maximum price restrictions). Lenders are now able to offer this type of mortgage funding thanks to mortgage loan (default) insurance.

This default insurance is legally required on any mortgage with a down payment of less than 20% of the property price (called a high-ratio mortgage) and protects the lender from borrower default or foreclosure.

The premiums of mortgage loan insurance are usually paid by the borrower as a one-lump sum or are factored into the monthly mortgage payments. Borrowers are still responsible for all other associated fees, such as application, appraisal and legal costs.

If you’re a first-time home buyer, there are also government programs and incentives to help you get into the real estate market (consult your mortgage specialist or financial expert for more information)

How can I use RRSPs to help buy my first home?

If you’re a first-time home buyer, the federal government has programs to help, including the Home Buyers’ Plan (HBP). This program allows you to withdraw up to $35,000 in RRSP savings ($70,000 for a couple) to help finance your first down payment, and to repay the withdrawn funds within a 15-year period.

Do you already have money saved for your first down payment? It may make good financial sense to apply your down payment through the Home Buyers’ Plan — provided you have enough RRSP contribution room for the intended amount. You may receive a tax deduction that could be applied back to repaying the RRSP withdrawal amount, or put towards other home expenses.

Our friendly, expert brokers can help you through all the details for this program, and others offered by the government. As well, you can talk to your financial advisor about the benefits and considerations of the HBP. In addition to down payment info, we can help you save more with your best rate and mortgage fit.

What are the costs associated with buying a home?

There are several costs that you’ll be responsible for when buying a home or property. Here’s a quick list for reference.

Down payment. You’ll need to have at least 5% down, maybe more, depending on your situation. To qualify for a conventional mortgage, you will need a down payment of 20% or more.

Deposit that counts towards your down payment, that is required by the seller to show your commitment to buy their property.

Home inspection fee. We highly recommend a professional home inspection, which will bring to light areas of repair or maintenance and to ensure the house is structurally sound. Ask for a written report for your future reference.

Mortgage default insurance (including PST) if you are putting less than 20% down. These premiums can be paid in a lump sum at the beginning, or factored into your mortgage payments.

Land Transfer Tax (LTT). Calculated as a percentage of the purchase price of the property, with the amount varying depending on the province.

Legal fees, disbursements and title insurance. These are costs that are associated with or are obtained through your solicitor. Fees for these services may vary significantly.

Other costs may be involved in closing your mortgage, such as property insurance, tax or utility adjustments.

Moving costs. Don’t forget to include the cost of moving your belongings, or paying for cleaning or upgrading before you officially move in.