The classic line is how much do I need for a new house? Millions of Canadians and Americans ask this question every year (although, decidedly fewer than the number that asked this question 5 years ago). There is just something about the idea of owning your house that really gives people a sense of comfort, achievement and satisfaction. There are all kinds of reasons why owning your own home is a great fit for some people while being out of reach for others.
Homebuyers today are constantly torn between the media messages regarding how much they can and should borrow in order to buy their first home. On the one hand, there is a glut of houses on the market in certain areas and interest rates will never be cheaper (especially for coveted 10-year locked in rates), on the other, many housing economies in Canada are overheated and some people simply shouldn’t be as far into debt as the banks will let them get. So who to listen to, and what fits your situation best?
It’s really difficult to give advice on how much house someone can afford without knowing their specific situation. As a general rule, the government and most big banks will say that your house-related costs (your mortgage, utilities, maintenance etc) should never exceed 35% of your gross income, and many would argue that number is way too high. To my way of thinking, the percentage of your gross income that you spend on your home is almost irrelevant in terms of setting a “rule of thumb” because each person is so different. The real number that we can draw conclusions from with real consistency is your debt-to-income ratio. If you have 35% of your gross income tied up in housing costs, but earn a high income and have no credit card debt, lines of credit, or student loans, then you will probably be just fine. To show the opposite side of the equation, if you gross 4K a month, and subsequently take home about 3K, while paying out a $500 car loan, $800 student loan, and have a revolving balance on your credit card(s) of 30K, then you probably shouldn’t take out a mortgage at all, never mind something that will eat up another 35% of your income!