Now that I’ve officially come out about my plan to save money for a downpayment on a house, let’s talk about how much house I can afford, and how I came to my overall target of $45,000 – $50,000 for my downpayment. I’ve spent a lot of time running the numbers and after a lot of deliberation, I’m comfortable with spending around $325,000 including my downpayment. Here’s how I came to these numbers and why you should think long and hard about how much home you can afford before committing to a budget.
But first, a lesson on how much house I can afford:
Don’t Spend More Than 35% Of Your Net Income On Housing
All of the major personal personal experts, including my personal favourite, Gail Vaz-Oxlade say you shouldn’t spend more than 35% of your net (not gross) income on housing. This keeps the rest of your income freed up for other important things like saving and debt repayment. I stuck to this rule when apartment hunting two months ago (my husband’s new job brings us in at 36%, almost perfect) and I plan to stick to it for house hunting.
So the first step in figuring out how much house I can afford is to figure out how much my husband and I are going to be making in five years. The trouble is, I’m not planning on buying a house for four or five years, and predicting our income at that time is a little dicey. So to compensate for uncertainty I used pretty conservative values. Assuming my husband and I gross $100,000 a year together, with a tax rate of 30%, we’d end up with $70,000 net per year, or $5,833 per month. Ideally I’d want to spend 35% of that on housing, or $2,050. (I’m playing fast and loose with these numbers, they are just ballparks).
So that means I can spend $2,050 on a mortgage payment right?
Nope!
35% of Net Income on Housing Includes Mortgage, Insurance, Utilities, Etc.
This is a big mistake I see a lot of first time homebuyers make. They think that, like rent, the mortgage payment is the only thing they need to worry about when buying a house. While it’s true your mortgage payment is the most significant expense, the other line items add up. Things like insurance, property tax, and utilities and condo fees can jack up the overall cost of your housing.
Fortunately RateHub.ca offers a handy estimator for these items in their mortgage payment calculator. I played around with this calculator for awhile and found a mortgage payment and utilities amount that equalled $2,050. Here’s what I got:
You’ll notice I set the phone and cable sections to zero, since I don’t have a landline or cable. This gave me a little wiggle room. As it turns out, with today’s excellent mortgage rates (which probably won’t last), I can afford a mortgage payment of around $1,344 per month. That’s a far cry from the $2,050 number I originally came up with, so I’m glad I knew to factor in all of these extra costs!
Translating A Monthly Mortgage Payment Into a Purchase Price
I know I can comfortably afford a monthly mortgage payment of $1,344. But what kind of purchase price can I afford?
With a downpayment of $15,000, that equates to around a $300,000 purchase price. This is a decent budget, but it doesn’t give me the buying power I want. In my neighbourhood, I would be limited to condos and townhouses, and what I really want is a house with a yard. I know if I compromised with a condo or a townhouse I’d just end up wanting to move in a few years, plus I live in an apartment now for much less per month, so why would I bother buying property and paying more for the same thing (and don’t say to build equity, because I can just invest the difference.)
By increasing my downpayment to $40,000, a $1,344 payment will cover a $325,000 mortgage, which is a little closer to where I want to be. At that price, a house with a yard is within reach.
Finally, you might be thinking a $40,000 downpayment, then why do you want to save $45,000 – $50,000?
To which I say: Don’t forget closing costs! Closing costs are expensive and can sure add up fast. Fortunatley RateHub.ca has us covered on that front too, they offer a nice little estimation:
According to their estimations I’ll need another $6,200 on top of my $40,000 downpayment for closing costs. In fact, that number is likely to be higher since this doesn’t include an inspection, and you’d better believe I’ll be getting one of those.
So there you have it. How I came up with a basic budget and downpayment size for my future home. I didn’t use a bank “How much can I afford?” Calculator and I didn’t rely on someone else to tell me. I sat down with pen and paper and figured it out myself. I’m glad I did it this way, because I have a feeling that I might’ve ended up spending a lot more than I intended if I’d relied on someone else to do the work for me.
Of course, many things could change in that time, including joint income (maybe we’ll earn more), mortgage rates (maybe they’ll go up) and the housing market (maybe it’ll go down). But in the mean time, this gives us a good baseline to shoot for, which is all I need at this point.
How did you decide on how much to spend on your home? I want to know!