The complete guide to buying your first home
These costs—which include lawyer fees, land transfer taxes and other administrative fees—vary somewhat based on the property price and location, but they typically add up to 1.5% to 4% of the purchase price. If you have saved $50,000 for a down payment, you either have to have additional savings to cover closing costs or deduct those expenses from the down payment itself.
You should also set aside money for the cost of home inspections, utility hook-ups, prepaid fees on the property you’re buying (for example, reimbursing the previous owner for property taxes or condo fees they paid in advance), plus any furniture and appliances you’ll want to purchase right away.
When you add it all up, if you expect to have a down payment of 5%, in reality you’ll need a minimum of 6.5% of the purchase price to cover these upfront costs, notes Patton. Then, you still need to factor in extra funds for emergencies, such as fixing a leaky roof or basement, or having to replace your furnace or A/C. For a property priced in the $600,000 range, she recommends an emergency savings of $5,000 to $10,000.
How much can I afford on a mortgage?
Once you have a sizable down payment in hand, the next step is figuring out how much you can afford on a mortgage—the amount you will pay back, with interest, to the lender. The mortgage is calculated as the total cost of your home, minus the down payment.
When you apply for a mortgage, your lender will look at your gross debt service (GDS) ratio and total debt service (TDS) ratio in order to determine how much mortgage a person with your debt and income level can reasonably carry.
These numbers are essentially a test of your income versus your debt (such as car loans and revolving lines of credit), plus anticipated housing expenses (i.e., your mortgage payments, heating bills, taxes, and any applicable condo fees) and will influence the mortgage amount you’re offered. According to the limits used by the Canada Mortgage and Housing Corporation (CMHC), your GDS and TDS cannot exceed 39% and 44%, respectively, for your home to be considered affordable.
In addition to these ratios, the amount a financial institution is willing to offer prospective home buyers is determined by assessing “the five Cs” of credit, says Patton. Lenders use this system to gauge an applicant’s credit worthiness—namely, how likely they are to make their mortgage payments consistently and on time. The five Cs refer to the applicant’s: