Can You Really Afford That House? Simple Math for First-Time Buyers

Buying a home is a big step, especially if it's your first. Many renters in Toronto are dreaming of owning their first home or condo. But how can you be sure you can really afford it? Let’s break it down using some simple math.

Understanding Your Budget

Before you start looking at homes, you need to know what you can afford. This means understanding your budget. Here’s how to start:

Calculate Your Income

Begin by figuring out your total monthly income. This includes your salary, any side gigs, or any other income sources. It’s important to be honest and realistic here.

List Your Expenses

Next, make a list of all your monthly expenses. This includes rent, utilities, food, transportation, and any other regular bills. Don’t forget about entertainment and savings, as these are part of your real lifestyle.

Calculate Your Net Income

Subtract your total expenses from your total income. This will give you an idea of how much money you have left each month. This leftover money is what you could potentially use for home payments.

Deciding on a Down Payment

A down payment is the first big chunk of money you pay when you buy a house. This is usually a percentage of the home’s price. Let’s look at how you can calculate what you’ll need.

Typical Down Payment in Toronto

For many first-time buyers in Toronto, a 5% to 20% down payment is common. The percentage often depends on the price of the home. If a house costs $500,000, a 5% down payment would be $25,000.

Saving for a Down Payment

Think about how much you can save each month. If you save $500 a month, after a year, you’d have $6,000 saved. Set a target based on the price range of homes you're considering.

Understanding Monthly Costs

When you buy a home, there are new monthly costs. Let's understand these costs.

Mortgage Payments

This is the money you'll borrow from the bank to pay for your home. You'll pay this back in monthly amounts. Banks will tell you the maximum they are willing to lend, but that doesn’t mean you should borrow the full amount.

Property Taxes

You will need to pay taxes to the city every year for owning your home. This can vary based on the value of the home and the area you live in.

Home Insurance

Just like you insure your car, you’ll need home insurance. This is to protect your home from damage or theft.

Maintenance Costs

Homes need regular care. Maybe the roof needs fixing, or the lawn needs mowing. Put aside a little money each month for maintenance.

How Much Mortgage Can You Afford?

Knowing how much you can afford in monthly payments is key. Here’s a simple method to calculate.

The 28/36 Rule

This rule suggests that your home-related expenses (mortgage, property tax, and insurance) should not exceed 28% of your gross monthly income. All your monthly debt payments (including the mortgage) should not be more than 36% of your gross monthly income.

For example, if your monthly income is $5,000, then $1,400 (28% of $5,000) is the maximum you should spend on housing.

Steps to Take Before Buying

Buying a house is more than finding a home you love. Here are some steps you should take:

Get Pre-Approved for a Mortgage

A mortgage pre-approval is a step before you officially apply for a mortgage. It shows you how much a bank is willing to lend you and assures sellers that you’re serious.

Check Your Credit Score

Banks look at your credit score. This number indicates how reliable you are at paying back borrowed money. A higher score can get you a better mortgage interest rate.

Plan for Closing Costs

Closing costs are extra fees that you pay when buying a home. This can include legal fees, inspection costs, and more, usually amounting to 1.5% to 4% of the home price.

Final Thoughts

Buying your first home is exciting, but it’s essential to do your homework. With this simple math and an easy checklist, you’ll know what you can afford and be a step closer to owning your first home in Toronto. Remember, being realistic about what you can afford will help you buy a home you'll love—and can keep paying for—in the long run.