Your Personal Finances

Home Ownership

Planning to buy your first home can be very exciting – and very scary. Buying a home is likely the biggest purchase you will ever make, and most likely will also be your biggest debt.

To ensure that you are able to meet your regular living expenses and maintain a standard of living you want when you buy your first home, all new homebuyers should kick-start the buying process by determining how much they can afford to borrow.

The amount will depend on a number of factors including your gross household income (before taxes are taken off), the amount you have saved for a down payment, and the mortgage interest rate. Lenders will also consider what else you own (your other assets) and your other debts.

Many lenders have online calculators that can help you estimate the maximum mortgage payments you can afford.

The Canadian Mortgage and Housing Corporation (CMHC) calculator at www.cmhc.ca shows you what you can afford to buy based on two general rules lenders use when considering how much they will lend:

1. Monthly housing costs (mortgage, property taxes and heating costs) should cost less 32% of your gross monthly household income.
2. Total debts including housing costs, car payments, credit cards and other debts, should not be more than 40% of your gross monthly income.

Here's an example:

Jack and Diane want to buy their first home:

• They have a combined gross annual income of $75,000 per year
• They have $20,000 for a down payment
• The mortgage interest rate is 6%
• Amortization is over 25 years – which means if the interest rate remains the same and you don't make any extra payments, the mortgage will be paid off in 25 years
• Monthly property taxes are $200
• Heating costs are $100 per month
• They have a $200 monthly loan for a car

Results of the CMHC Calculator:

• They can afford a home worth $280,000 paying $1,700 a month in mortgage payments

But, a key consideration missing with these calculators is your desired lifestyle. If you still want to go out for dinner frequently, continue to take vacations etc., you need to take those costs into consideration when you are working out the "realistic" monthly mortgage payment you can afford. Make sure sit down with a financial advisor to look at all the financial implications of paying down a large mortgage.