How much house can I actually afford?

Buying a home is one of the biggest financial decisions you will ever make. But with many houses being priced at more than double what they were a decade ago, and interest rates rising rapidly, it can tempting to spend more than you can comfortably afford. While many experts agree that you should spend no more than 30% of your gross monthly income on mortgage payments, there are a few other factors to consider when deciding what your price range should be when buying a home.

1. Could you afford the mortgage if your income were reduced?

One of the common mistakes that people make is thinking that their income will always be stable and consistent. They assume that once they attain a certain salary level, there is no going back down. As a result, they will make major purchases at the highest prices that their current salaries will allow them to afford.

While a steadily rising income is a reasonable expectation, recent years have taught us that the economy and job market can be unpredictable. Changes to your income can happen overnight. Your employer may lay you off due to restructuring, your entire industry could be impacted by something like a pandemic, or you may experience an illness or injury which prevents you from doing your job for months. In these events, government subsidies and employment insurances will not be enough to balance a budget that is heavily dependent on your full income. Make sure that your mortgage payments leave you with enough room to get by if your income is ever temporarily or permanently reduced.

2. Will you still have room in your budget for your current expenses?

While financial institutions and mortgage lenders will put you through a stress test and multiple qualifiers to determine how much house you can afford, it is important that you also do your own calculations. The banks and financing companies usually make their decisions about what you can afford based on four main things; your credit report and score, your annual salary, your debt load and your down payment. These criteria work on the assumption that if you were to ever face financial hardship while owing them money, you would still make their payments a priority and continue to use whatever income and earnings you have to make your monthly payments to them. While mortgage lenders will factor in your monthly estimated expenses, such as utilities and living costs, they have no idea what your actual spending is like. Your financial institution will not know if you spend $800 a month on private therapy, or if your car insurance is $650 a month because you were involved in two accidents last year. It is up to you to consider these expenses when preparing your budget, to determine what monthly payment you can really afford when applying for a mortgage.

3. Will you be able to build savings after purchasing your home?

In addition to your regular monthly expenses, you want to be able to set aside money each month for different types of savings. The first one you want to build is your emergency savings fund. The goal is to eventually have at least enough in this savings account to cover three to six months of living expenses. Emergency funds are especially important when you own a home or a vehicle, because these items can incur costly repair expenses. Usually the bigger the home, the higher the maintenance and repair costs when something goes wrong.  Emergency funds may also be needed for other unexpected expenses such as medical needs, veterinary bills or a last-minute trip overseas to visit a dying relative.

When people don’t set aside funds for these types of expenses, they often resort to using credit cards or taking on other high-interest debt to cover these bills. And if one has no means of paying off this debt in a short time-frame, accumulating interest can cause this debt to quickly escalate out of control, and take even years to pay off. This is why it is important to have room in your budget for building savings each month.

You also want to be able to save for your retirement, as well as a registered education savings plan (RESP) if you have a child. It can be difficult to make room in your budget for these savings plans after taking on a mortgage, so it is important to prioritize them in your calculations before purchasing a home. You may think that you will be able to afford them more easily later on, but with increasing cost of living expenses and mortgage rates, there is no guarantee that this will happen.

4. Will you still be able to live?

Now of course we all know that owing a home usually involves a certain amount of sacrifice. And most of us are okay with this if it means reaching the goal of home ownership. Just be sure that your home purchase won’t leave you unable to enjoy life. When creating your forecasted home ownership budget, remember to include all of the fun things you will sporadically want money for. This could be simple expenses like birthday and Christmas gifts, date nights or sporting events, or bigger items such as vacations and hobbies. While you may need to cut back on some of these items, you don’t want to be so house poor that you get stressed out at even the thought of being invited somewhere.

Home ownership can be amazing, but it can also be a nightmare if not planned for properly. We are often told things such as, “bigger is better” and “everyone struggles at first” by well-meaning friends and family members to justify spending more than we can afford.  However, doing your own calculations and being prepared financially can help you can spend less time worrying about your home, and more time enjoying it.

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