November 2024
Many want to understand condo living before buying. For them, the first step is understanding how much condo they can afford.
Many Canadians are finding they have misjudged the risks of borrowing large amounts of money while interest rates were at historic lows to purchase a home. It is not uncommon to have taken on a $700,000 mortgage requiring payments of about $3,200 monthly at a mortgage rate in the range of 2.5 percent. As interest and mortgage rates have increased, these payments have grown to about $5,000 per month. With an annual household income below $100,000, these mortgage payments are unsustainable.
Before purchasing a home, consider how much you can really afford.
- Having at least 25 percent of the purchase price in cash allows for a 20 percent down payment which eliminates the need for mortgage default insurance. That additional cash will be needed to pay land transfer taxes, closing costs, expenses of home ownership and unforeseen expenses. For that $700,000 mortgage, have $175,000 in cash.
- Use no more than 30 percent of your household income to pay monthly costs including mortgage, property taxes, insurance, utilities and condo fees. This would be $30,000, or $2,500 monthly, for a household income of $100,000.
- Limit your purchase price to no more than three or four times annual household income. At a household income of $100,000, assuming satisfying the other criteria, the most you should pay for a home is $400,000.
Many choose to ignore these criteria when purchasing a home. They have little to no savings, are unprepared for increases in the mortgage rate or condo fees, and save nothing for retirement. They run out of money as they get older and are unable to retire. There is no margin of safety if someone gets sick, injured or is unable to continue working. They are forced to sell the home to repay debt and to survive.
