How Much Home Can You Afford?

Buying a first home is an exciting milestone filled with possibilities—from imagining the perfect space to exploring neighbourhoods that suit your lifestyle. But before browsing listings or visiting showhomes, it’s essential to understand what’s financially realistic. Knowing ones affordability helps narrow their search and leads to a smoother, more confident homebuying experience.

This blog outlines four key steps to help homebuyers determine their budget: understanding the full costs of homeownership, getting pre-approved for a mortgage, using affordability calculators, and improving credit scores.

Step 1: Understand the Full Costs of Homeownership

Affordability goes beyond the purchase price. Homebuyers should consider the following costs:

• Down Payment – This is the upfront amount paid toward the home’s purchase price. In Canada, the minimum down payment is:
  • 5% for homes under $500,000
  • 10% for the portion between $500,000 and $999,999
  • 20% for homes $1 million or more
  • 💡Tip: A larger down payment can reduce mortgage insurance premiums and monthly payments.
• Mortgage Payments – This is the ongoing, monthly payment required and includes:
  • The principal is the portion that goes toward repaying the original amount you borrowed.
  • The interest is the cost charged by the lender for borrowing that money, calculated based on the loan balance and interest rate.
• Closing Costs – These are one-time expenses that are due at the time of finalizing the home purchase, and they typically range from approximately 1.5% to 4% of the home’s total price. Closing costs cover a variety of legal and administrative services that ensure the transaction is properly completed and can include, but are not limited to:
  • Legal fees – This covers the fee for lawyers to complete any required paperwork relating to the sale of the property.
    • At Cedarglen Homes, we cover the legal fees for the homebuyer when they choose our preferred legal partner, PMR Law.
  • Title insurance protects homeowners against issues like title fraud, unpaid liens, building permit violations, and errors in Real Property Reports or ownership records.
  • Property Insurance is required when you get a mortgage.
• Ongoing Ownership Costs – Owning a home means ongoing financial responsibilities, such as:
  • Property taxes (varies by municipality)
  • Home insurance
  • Utilities (electricity, gas, water, internet)
  • Maintenance and repairs
  • Condo fees or HOA dues (if applicable)
  • 💡Budget 1–3% of the home’s value annually for maintenance and unexpected repairs.

Step 2: Get Pre-Approved for a Mortgage

A mortgage pre-approval provides a clear understanding of the maximum loan amount a homebuyer may qualify for. This amount depends on several factors, including the size of the down payment, existing debt, and whether the homebuyer is selling another property. It’s a crucial step that helps homebuyers shop with confidence.

What Is Required:

• Proof of income (pay stubs, T4s, tax returns)
• Employment verification
• Credit report and score
• List of assets and liabilities

Why It Matters:

• Sets a realistic price range
• Shows sellers that the homebuyer is serious
• Helps identify and fix any financial issues early

💡 Prospective homebuyers should avoid making large purchases or opening new credit accounts during this process as it could affect their approval.

Step 3: Use Affordability Calculators

Affordability calculators are valuable tools that help prospective homebuyers estimate how much they can realistically spend on a home. These calculators take into account a variety of financial factors to provide a clear picture of what fits within a ones budget.

Key Factors Considered:

• Gross annual income
• Monthly debt obligations
• Available down payment
• Current interest rates
• Desired loan term
• Estimated property taxes and insurance costs

💡 It’s wise to use multiple affordability calculators from different sources, such as banks or real estate websites. Comparing results can help fine-tune the budget and provide a more accurate financial outlook.

• CMHC Mortgage Calculator
• RBC Mortgage Calculator
• BMO Mortgage Calculator
• Scotiabank Mortgage Calculator
• TD Mortgage Calculator
• CIBC Mortgage Calculator

Step 4: Improve Credit Score Before Buying

A homebuyer’s credit score plays a crucial role in both mortgage approval and the interest rate offered by lenders. A higher score can lead to significantly lower borrowing costs—potentially saving thousands of dollars over the life of the loan.

Ways to Improve a Credit Score:

• Make timely payments: Since payment history is the most influential factor, consistently paying bills on time is essential.
• Reduce credit utilization: Keeping credit usage below 30% of the available limit can positively impact the score.
• Limit new credit inquiries: Applying for multiple credit accounts in a short period can lower the score, so it’s best to avoid unnecessary applications.
• Review credit reports: Regularly checking for errors and disputing inaccuracies helps maintain a healthy score.
• Maintain older accounts: A longer credit history contributes positively, so keeping longstanding accounts open is beneficial.

💡 Tip: It’s recommended to begin improving credit at least 6 to 12 months before applying for a mortgage to ensure the best possible terms.

📝 Final Thoughts

Determining how much home a buyer can afford goes far beyond the listing price—it requires a clear understanding of their overall financial situation. By carefully reviewing their budget, securing mortgage pre-approval, using affordability calculators, and accounting for all the ongoing costs of homeownership, homebuyers can approach the process with confidence and clarity.

Whether someone is just beginning their homebuying journey or preparing to make an offer, taking these foundational steps early on helps lay the groundwork for a smart purchase and long-term financial success.