Financial advisor calculates income needed to buy a home in Canada

A certified financial planner has calculated the household income needed to qualify for a mortgage on a home in Canada, and the higher income required to own one comfortably.

Christopher Liew, a CFP and former financial advisor, outlined the figures for three common price points based on current mortgage rules and his own recommendations.

Using the Bank of Canada's average five-year insured fixed mortgage rate of 4.01 per cent from June, and applying the federal mortgage stress test, Liew said the income needed to qualify is roughly $90,000 for a $400,000 home, $150,000 for a $700,000 home, and $210,000 for a $1 million home.

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"Those are approximate, and your lender’s exact numbers will vary," Liew wrote in an analysis for Blueprint Financial. "But if your household income is well below the figure for the price you’re looking at, the approval probably isn’t coming."

The calculations assume a first-time buyer with the minimum down payment, a 30-year amortization, property tax at 1 per cent of the price, $250 a month for heat, and no other debt.

Lenders qualify borrowers at a higher rate than their contract rate, using the greater of 5.25 per cent or the contract rate plus 2 per cent, which works out to about 6 per cent currently.

They also cap total housing costs at 39 per cent of gross household income for an insured mortgage.

Liew said 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," he wrote. "In my experience, that’s where budgets start to break."

He recommends housing costs be at a third of gross income or less, measured against the stress-test payment, not the initial payment.

"The stress-test number is what you could be facing at renewal if rates move, so it’s the safer one to plan around," Liew wrote.

On that basis, he said the income needed for comfortable ownership is closer to $105,000 for a $400,000 home, $175,000 for a $700,000 home, and $245,000 for a $1 million home.

"If you’re between the lender’s number and mine, you can still buy," Liew wrote. "You’ll just have less room for everything else, and it’s worth being honest with yourself about that before you commit."

He noted that ownership costs vary by province due to differences in property tax, heating, insurance and income tax.

"A $700,000 house costs the same to finance in every province, but it doesn’t cost the same to own," Liew wrote. "The gap between two cities can add up to thousands of dollars a year."

For buyers whose income is short, options include a larger down payment, which reduces the mortgage, or using a 30-year amortization to lower payments.

Adding a co-borrower or qualifying income from a side business or rental suite can also raise the approved amount.

Liew advised keeping closing costs separate from a down payment.

He said the Bank of Canada held its policy rate steady but has warned that inflation risks are rising.

"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," Liew wrote.

With files from BNN Bloomberg