You’re looking for a new home and your real estate agent wants to know how much you want to spend. Before you answer that question you need to determine how much you can afford. In making that decision you need to look beyond the purchase price. There are a lot of hidden costs that appear, both before and after you buy a new home.
The total cost of purchasing a new home is determined by two factors:
- the upfront costs
- your monthly carrying costs
How much home you can afford needs to be based on budgeting for all of these possible expenses, not just the price tag on the offer.
Upfront Purchasing Costs
Most people know they have to come up with a down payment and start saving early. If you hope to obtain a conventional mortgage, with lower rates, you will need a down payment of at least 20%. You can purchase a home with a minimum down payment of 5% however that will result in having to pay mortgage loan insurance.
Many first-time home buyers are surprised by the number of additional fees and costs which quickly eat away at the money they have set aside for their home purchase. These costs can include:
- appraisal and survey fees
- home inspection fees
- land registration or land transfer taxes
- legal fees
- title insurance
- prepaid property taxes and utilities
- if applicable, water and septic or other inspections
- bridge financing
- appliances and furniture needs
Many of the items on this list are based on the Canada Mortgage and Housing Corporation home purchase budget worksheet. If you are considering purchasing a new home, we strongly recommend budgeting for all potential costs so you purchase only what you can afford.
Your Monthly Housing Costs
Lenders will often look to something known as your Gross Debt Service Ratio to determine how much mortgage you can be approved for. As a rule they will allow you to use no more than 32% of your gross income on housing costs including your mortgage payment, property taxes, heating and some condo fees.
While this may be the amount you will be approved for (assuming you otherwise have good credit) this doesn’t mean this is the amount you should spend on a new home. It’s important that your housing costs fit comfortably into your family budget. Extending yourself to the max right off the top is usually not a good idea.
Generally speaking you should not be spending more than 35% of your after-tax income (your take home pay) on housing related costs. This is more than just your mortgage payment. Your monthly mortgage and property tax costs typically account for less than 80% of the total amount spent on owning a home. Think about that. If your monthly mortgage and property tax payment is approximately $1,600 a month, your additional housing costs are likely another $320. This will include homeowners insurance, repairs & maintenance and utilities. Don’t let these ‘hidden’ costs be forgotten in the heat of the moment when deciding how much of a home you can afford.
How much home you should buy, and by extension how much mortgage you should take on, should be based on the total financial picture. You need to be sure you are not pushing your affordability beyond what you will be able to handle comfortably. This way, you will be able to enjoy the home you buy, rather than stress about it.