Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.
Home prices get a lot of attention, but the more useful question is what income it takes to carry one comfortably. That depends on the rate you qualify at, your down payment, and what else you’re paying for each month. Below, I’ll go through three common price points and show what income a lender will look for at each one, and what I’d consider a comfortable number.
The rate I’m using
The Bank of Canada held its policy rate at 2.25 per cent on September 2, and as CTV News reported, it warned that inflation risks are rising. Insured fixed mortgages of five years or longer averaged 4.01 per cent in June, according to Bank of Canada data, so that’s what I’ve used below.
My other assumptions: a first-time buyer, the minimum down payment (5 per cent of the first $500,000 and 10 per cent of the rest), a 30-year amortization, property tax at 1 per cent of the price, $250 a month for heat, and no other debt. All income figures are household income.
1. What a lender will want to see
Lenders qualify you at a higher rate than the one you’ll actually pay. Under the federal stress test, that’s the greater of 5.25 per cent or your contract rate plus 2 per cent, which works out to about 6 per cent today.
Lenders also cap your mortgage payment, property tax, and heating at 39 per cent of gross household income on an insured mortgage. Put those two rules together and the income needed works out to roughly: $90,000 for a $400,000 home; $150,000 for a $700,000 home; and $210,000 for a $1 million home. For a couple, that’s two salaries of about $45,000, $75,000, and $105,000 respectively.
Those are approximate, and your lender’s exact numbers will vary. But if your household income is well below the figure for the price you’re looking at, the approval probably isn’t coming.
2. What I’d consider comfortable
Qualifying and being comfortable are different things. At 39 per cent of gross income, your housing costs are closer to half of your take-home pay once tax comes off, and that’s before food, transportation, or saving anything. In my experience, that’s where budgets start to break.
I’d rather see housing costs at a third of gross income or less, and I’d measure that against the stress-test payment, not the payment you’re offered today. The stress-test number is what you could be facing at renewal if rates move, so it’s the safer one to plan around. On that basis, the income needed is closer to $105,000 for the $400,000 home, $175,000 for the $700,000 home, and $245,000 for the $1 million home.
If you’re between the lender’s number and mine, you can still buy. You’ll just have less room for everything else, and it’s worth being honest with yourself about that before you commit.
3. Where you live changes the answer
A $700,000 house costs the same to finance in every province, but it doesn’t cost the same to own. Property tax rates, heating bills, home insurance, and provincial income tax all affect what’s left after the mortgage is paid, and the gap between two cities can add up to thousands of dollars a year.
I looked at this in a recent Blueprint Financial video comparing moving provinces versus leaving Canada, and the cost-of-living differences were larger than I expected going in. If a price tier feels out of reach where you are, it’s worth running the same numbers for another city you’d realistically consider.
4. Ways to close the gap
If your income comes up short, there are a few options. A larger down payment reduces the mortgage, and at 20 per cent you avoid mortgage default insurance entirely. A 30-year amortization (available on insured mortgages to first-time buyers and anyone buying a new build) lowers the payment compared with 25 years, though you’ll pay more interest over time and a small surcharge on the insurance premium.
Adding a co-borrower, or qualifying income from a side business or rental suite, can also raise what you’re approved for, although lenders won’t necessarily count every dollar of that income.
Whichever route you take, keep closing costs separate from your down payment. Land transfer tax, legal fees, and moving expenses come out of savings before your first payment, which I went through in a recent column on closing costs.
Final thoughts
The income a lender needs to see and the income that makes a home comfortable to own are two different numbers, and it’s worth knowing both before you start looking. The policy rate is steady for now, but the Bank of Canada has said it’s prepared to move if it needs to and has been flagging inflation risk, so leaving yourself some room makes sense. If you’re close but not quite there, a bigger down payment, a different city, or a bit more time can get you the rest of the way.
