October 26, 2017

Can You Afford to Buy a $1-Million Home?

As a kid, being a millionaire meant that you’d made it. But now, a million dollars went from being the stuff of dreams to the amount you need to buy a decent home in a nice Toronto neighbourhood.

So, the question is, can you afford to buy a $1-million home?

Down, but by no means a deal

Earlier this year, the average price of a detached home in Toronto hit an all-time high of $1.5-million and change. Prices have since dropped but according to the Toronto Real Estate Board (TREB), as of September, detached homes were selling for $1.3-million, and semi-detached homes weren’t far off the million-dollar mark at $935,000.

With prices at those levels, you might ask yourself how much mortgage can I afford? The amount you can afford comes down to four key factors: Your income (plus that of your partner or spouse), your credit rating, your debt and ongoing expenses, and the amount of money you have available for the down payment. More on the latter in a moment.

A mortgage affordability calculator usually factors in the asking price, mortgage terms, land transfer tax (LTT), and other expenses to help calculate what your monthly mortgage payment would be.

Down payment dilemma

Federal regulations require buyers to make a minimum 20 per cent down payment on any home costing $1-million or more. That means you have to have at least $200,000 cash available at closing.

Unless you’ve been very good at saving your money, or have come into a windfall from, say, an inheritance, that will likely rule most first-time home buyers out of the million-dollar market.

If you’re an existing homeowner you’ll need to make sure the proceeds of the sale of your current home (sale price minus remaining mortgage amount), less realtor fees, land transfer taxes, and other closing costs are at least enough to cover the 20 per cent minimum.

You can use a land transfer tax calculator to figure out how much provincial LTT—plus municipal LTT if the home you’re buying is in Toronto—you’ll need to pay based on the estimated sale price. First-time buyers are eligible for rebates on the LTT. The calculator can also factor that in.

Related Read: Tougher OSFI Mortgage Rules to Come in January

More than a mortgage to cover

While your mortgage will most certainly be your largest recurring monthly carrying cost, there are a number of other bills you’ll also need to cover, including utilities, phone plans and internet connection, home and property insurance, car payments, and so on. Again, a mortgage affordability calculator lets you input these costs when running your calculations. Keep in mind that if you’re upgrading from a small home or condo to a larger one, the cost of your utility bills will likely also grow so you may want to round up a bit.

The biggest fee to be affected by the value of your home is the property tax bill. The tax rate for Toronto residents in 2017 is about 0.48 per cent, plus a 0.179 per cent education levy, for a total of 0.659 per cent. On a $1-million home assessed at full market value, that works out to $6,590 a year.

Adding it all up

Your mortgage broker or financial institution can calculate precisely how much you can theoretically afford to pay for a home based on your income and debt service ratios, but you’re wise to not buy something at the high end of your personal affordability index.

Rising interest rates, prolonged illness, loss of a job, starting a family, or substantial unforeseen home repair costs can all cause the roof to come crashing down around you if you’re stretched too thin. Find out what you qualify for, and then start looking for homes that will leave yourself at least a bit of wiggle room.

Ratehub.ca is a website that compares mortgage rates, credit cards, high-interest savings accounts, chequing accounts, and insurance with the goal to empower Canadians to search smarter and save money.