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$ 1 million used to be enough money to keep you for life, but those days are long gone. In some parts of Canada, you're in luck when $ 1 million will buy you a decent home, let alone finance your retirement. This couldn't be truer in cities like Toronto, where the average home price was $ 800,000 in 2019.
Even COVID-19 hasn't slowed soaring prices in Canada's largest cities, as house and condo prices continued to rise sharply in many markets in 2020.,
So when $ 1 million homes become the norm in cities like Toronto, Vancouver, and Montreal, are you one of the lucky Canadians who can afford one? Let's look at the factors that determine whether you can afford the average mortgage on a $ 1 million home.
Can You Afford a Million Dollar House?
Here is the short answer: to buy a million dollar home in Canada, you need an annual income of at least $ 175,230 and a cash down payment of at least $ 200,000. That is the minimum you need to qualify for a large enough mortgage, well that or you will need $ 1 million in cash to avoid a mortgage altogether.
What's a million dollars today?
remember the song "If I Had $ 1,000,000" by the Barenaked Ladies? When the band released the song in 1992, $ 1 million had serious spending power. Fast forward a couple of decades and it's a different story.
Thanks to inflation, money loses value over time. Inflation is the annual increase in the cost of goods and services that affects everything from food and electronics to wages and real estate., Because of inflation, something that could have cost a million dollars in 1992 is going to cost a lot more in 2012. , 45d6990 "> $ 1,000,000
Source: Smart Asset Inflation Calculator
As you can see above, inflation has a serious impact on the value of $ 1 million over 40 years., As of 2021, one million dollars is only worth about half of what it was 20 years ago.
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Most Canadians who buy a $ 1 million home don't have $ 1 million in cash, just lying around. Most of them would have to save a down payment and take out a mortgage on a $ 1 million home.
So, can you afford to get a mortgage on a $ 1 million home ?, There are two key factors that affect your mortgage affordability - your down payment, and your gross debt ratio.
Not that a large enough down payment is what disqualifies most buyers from buying a $ 1 million home. Saving for a mortgage down payment is hard enough, but Canadian law states that homes over $ 1 million require a down payment of 20% or more.,
If you buy a home with less than 20% down payment, your mortgage is what is called a high ratio mortgage and you are required to pay for mortgage loss insurance. Mortgage default insurance protects your lender in the event you default on your loan. Mortgage default insurance is typically purchased by your lender from Canada Mortgage and Housing Corporation (CMHC). However, the CMHC does not provide insurance for homes over $ 1 million.,
Since a high-ratio mortgage on a million dollar home is out of the question, you'll need a 20% down payment of at least $ 200,000, resulting in a typical mortgage on a million dollar home of $ 800,000 . But that's not all - you also have to pay closing costs. Closing costs are typically 1.5% to 4% of the value of a home and include expenses like a home inspection fee, legal fees, title insurance, and property transfer tax (LTT).
Real estate transfer tax is by far the most expensive closing cost in most provinces., In Toronto you have to pay property tax twice: once to the Ontario government and once to the Toronto City Council. Use this land transfer tax calculator to help determine how much you owe on graduation. Expect closing costs between $ 15,000 and $ 40,000, depending on your location.
To be on the safe side, you should have your $ 200,000 down payment plus an additional $ 40,000 for closing costs to buy a $ 1 million home. So this factor is the one that disqualifies most homebuyers: not many homebuyers have a cool quarter of a million sitting around!
If you are one of the few Canadians with a large enough deposit, congratulations! Now let's see if you can afford the monthly mortgage payments on a million dollar home. We determine this by calculating your debt service ratios.
Debt service ratios
Your debt service ratios determine whether you can afford the payments on a million dollar mortgage (or any size mortgage). Your debt service ratios are two formulas set by the CMHC that lenders use to find the maximum mortgage they can afford, your maximum mortgage then added to your down payment to determine your maximum purchase price. Let's look at the first of the two formulas: the gross debt ratio.
Gross debt service ratio:
Your gross debt service ratio determines whether you can afford the monthly book costs associated with your home. Your lender adds your annual mortgage payments to the cost of owning your home and then divides that by your annual household income. To qualify for the loan, the resulting quota must be less than 32%., This is the official formula:
Let's calculate the gross debt service ratio for a $ 1 million home. If you bet 20% on a $ 1 million home, you have an $ 800,000 mortgage. Using Ratehub.ca’s mortgage payment calculator and today's best mortgage rate of 2nd, 54%, we can determine this mortgage rate would leave you with a monthly mortgage payment of $ 3,600. Since this mortgage is for a million dollar home, condo fees don't factor in.
Your gross debt ratio needs to be less than 32% for you to afford this home. That means your household income must be more than $ 174,037 per year to qualify ($ 55,692 ÷ $ 174,037 = 32%).
Total debt service ratio:
Now let's look at the next debt service ratio: your total debt service ratio. This ratio takes into account the above factors, but also adds any debt obligations., Here is the official formula:
We run our pay again, but also factor in a $ 600 per month car loan, and $ 600 per month student loan.
In this case, your ratio cannot be more than 40%. That means you need at least $ 175,230 income to be able to afford your mortgage and other debt obligations ($ 70,092 ÷ $ 175,230 = 40%).,
To meet both debt service ratios, you must have at least $ 175.230 annually to buy a $ 1 million home.
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Income required to buy a $ 2 or 3 million home
The same requirements apply to buying homes that cost more than $ 1 million. Here is a table that shows how much it takes to buy a $ 2 million house, a $ 3 million house, and a $ 5 million house.,
* Required income calculated using TDS assuming $ 600 car loan and $ 600 student loan payments.
As you can see, the income to buy a $ 2 million home and the income needed to build a $ 3 million home are pretty high. This is because, at these rates, your mortgage is huge, even with a 20% down payment.
Be careful when borrowing for your maximum affordability
Under these circumstances, you can afford a $ 1 million home on an income of $ 175,230, but that doesn't mean it's a wise financial decision., When deciding how much to spend on a home, consider that consider the following variables:
Saving for Retirement: The debt service ratios above do not take into account saving for retirement. You should make sure that there is enough room in your budget to save for your retirement. Many experts recommend saving at least 10% of your gross salary for retirement.
Rising Interest Rates: While you could potentially afford a $ 1 million home at today's interest rates, keep in mind that interest rates can change dramatically over the long term., Make sure you are still getting your $ 1 million home. Dollar House can afford when you need to renew at higher prices. For example, if you had to renew your mortgage at a historical rate of 3.89%, your monthly mortgage payment would increase to $ 4.161. Can you still afford your home? Run the numbers through our mortgage affordability calculator to be sure.
Life Events: While you have the income to afford a $ 1 million home now, make sure you are still able to afford your home if major life events happen., Examples could be having a baby send a child to university, retire, or buy some other property. These events will change your budget, but they shouldn't change whether you can afford your home.
The final result
Buying a $ 1 million home is no easy task. You need a large down payment and your debt should be under control. You need a high income and the ability to deal with your mortgage renewal at higher interest rates. The good news is that if you meet these requirements, you can afford a $ 1 million monthly payment - or maybe even $ 1, 5 million house-dollar monthly payment. If unsure, use our mortgage affordability calculator or calculate mortgage payments for various property prices to run the numbers and figure it out for yourself.
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