Odin Says ...

How Much Money Can You Spend on a Home?

May 25, 2010

'Homes along White Oak Bayou in Houston' by (Bill and Mavis) - B&M Photography, licensed under the Creative Commons Attribution-ShareAlike 3.0 Unported License

Most home purchases involve borrowing money in the form of a mortgage.

As a rule thumb, the buyer shouldn't take out a mortgage requiring him or her to spend more than a third of his or her gross income on overall housing costs, which include taxes, condo fees (where applicable), insurance, heating and electric costs.  Based on this, it is easy to calculate the maximum monthly mortgage payment one can afford, which would in turn dictate the maximum home price attainable.

However, the situation gets trickier, because there are a lot of other expected and unexpected expenses that accompany the purchase of a home.  These expenses, which may have to be paid for in a lump sum as opposed to monthly, also need to be accounted for.  For example, the new home might need slight or major renovation and maintenance.  Next, the purchaser needs to consider other expenses such as a home inspection, notary fees, welcome home taxes, home insurance as well as mortgage loan insurance (if the down payment was less than 20% of the home value).

The mortgage loan insurance is meant to allow potential homebuyers to acquire a home even if they do not have the minimum 20% down payment, which in today's economic and real estate situation, represents the vast majority of cases.  A notary can be consulted by future homeowners to evaluate their purchasing power, and get a more accurate picture of their financial situation, as a function of their net worth, assets and liabilities.

Moreover, Revenue Canada has created the Home Buyers' Plan to help first-time buyers increase their down payment.  In short, the buyer is allowed to withdraw up to $25,000 from his or her RRSP ($50,000 for a couple), tax-free, and contribute it towards the down payment.  Afterward, the buyer has fifteen years to redeposit the amount withdrawn from the RRSP.  More information about the program can be found on the Revenue Canada website.

Finally, a handy calculation tool is available on the Canada Mortgage and Housing Corporation website.  The tool can be used by home buyers to establish the monthly mortgage payments they can afford, taking into account a number of variables.