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Old Posted Oct 12, 2017, 6:45 PM
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MolsonExport MolsonExport is offline
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Join Date: Oct 2003
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Can I Afford a Million Dollar Home?

our down payment will be the first factor that’ll disqualify most buyers from purchasing a $1-million home. This is difficult to meet because all homes with a purchase price above $1 million require a down payment of 20% or more.

Typically, if you’re buying a home with less than a 20% down payment, your mortgage is considered a high-ratio mortgage and you’re required to purchase mortgage default insurance. Mortgage default insurance protects the lender in the event you default on your mortgage.

Usually, you can buy mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC), but it won’t provide insurance for homes valued at more than $1 million.

Since a high-ratio mortgage is out of the question, you’ll need at least 20% for a down payment or at least $200,000. But that’s not all. You’ll also need to pay closing costs. Closing costs usually amount to 1.5% to 4% of a home’s value and include expenses like a home inspection fee, legal fees, title insurance, and the land transfer tax (LTT).

The LTT is by far the most expensive closing cost and in Toronto you have to pay LTT twice: once to the province and once to the municipality. Use the land transfer tax calculator to determine how much you’ll owe at closing.

Depending on your location, you should expect to pay between $15,000 and $40,000 in closing costs. To be on the safe side, you should have your down payment of $200,000 plus an additional $40,000 for closing costs to buy a $1 million home.

It’s easy to see why I called this factor the one that will disqualify the most homebuyers: Not many homebuyers have nearly $250,000 sitting around for a purchase like this!
Indeed, my first mortgage was less than $250K (current mortgage was at the closing date, about $500K). In other words, my original (first) mortgage principal debt WAS LESS than the down payment currently required for a million dollar home.

our gross debt service ratio determines whether you can afford the monthly carrying costs associated with your home. The ratio is calculated using the following formula:

Mortgage payments + property taxes + heating costs ÷ annual income

This ratio must be less than 32%. To calculate your gross debt service ratio, let’s use the following housing costs for your $1-million home.

If you put 20% down on a $1-million home, you’ll have an $800,000 mortgage. Using’s mortgage payment calculator and today’s best five-year fixed mortgage rate of 2.64%, we can determine that this mortgage rate would leave you with a monthly mortgage payment of $3,640.
Expenses Monthly expenses Yearly expenses
Mortgage amount $3,640 $43,680
Property tax $1,017 $12,204
Heating costs $392 $4,704
Total $5,049 $60,588

Your gross debt service ratio needs to be less than 32% for you afford this home. That means you (or your and your partner) will need an income of at least $189,337 per year to qualify: $60,588 ÷ $189,337 = 32%

Now let’s look at the next debt service ratio: your total debt service ratio. This ratio takes the factors above into account but also adds in any debt obligations you may have. Let’s add in a car loan at $600 a month and student loans at $600 a month. The formula will then be (assuming a lower monthly expense for mortgage amount):

Mortgage payments + property taxes + heating costs + car payments + student loan payments ÷ annual income
Expenses Monthly expenses Yearly expenses
Mortgage amount $3,640 $43,680
Property tax $1,017 $12,204
Heating costs $392 $4,704
Car loan $600 $7,200
Student loan $600 $7,200
Total $6,249 $74,988

In this case, your ratio cannot be more than 40%. That means you’ll need an income of at least $187,470 to afford your mortgage and your other debt obligations: $74,988 ÷ $187,470 = 40%

To satisfy both debt service ratios, you’ll need an annual income of at least $189,337 to afford a home worth $1 million.
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