Once upon a time, a million dollars used to be the gold standard for retirement. It was the magic number that people strived towards to feel financially stable. Today, that is no longer the case. And that rings especially true for those living in cities such as Toronto, Mississauga, Oakville, Maple, and other major cities and suburbs. In these cities, property prices have risen at breakneck pace over the past decade, refusing to even be slowed by the advent of COVID-19. So that raises the question: What do you need to be able to afford a million dollar house?
Let’s start with the down payment. This is the place where most borrowers are deterred from continuing with a million-dollar mortgage. The reason for this is that Canadian regulations require that for homes with a list price of one million dollars and more, a minimum of a 20% down payment must be made. For a million dollar home, that means forking up $200,000 right off the bat with the remaining $800,000 to be provided by the lender. In addition to this, you also need to pay closing costs such as legal fees, home inspection fees, title insurance, land transfer tax etc. All of these costs can add up to as much as 2% to 4% of your home.
The next requirement is the income to debt ratio. There are two main ratios that lenders use: the gross debt service ratio (GDS or GDSR) and the total debt service ratio (TDS or TDSR). The gross debt service ratio is used to determine how much of your income is spent on your regular housing expenses. The official formula is (Principal + Interest + Taxes + Heat) / Gross Annual Income.
The total debt service ratio looks at your housing expenses, as well as your other debts that you may have outstanding to assess your ability to manage your debt load based off your income. The official formula for this is (Principal + Interest + Taxes + Heat + Other Debt Obligations) / Gross Annual Income. Note that the ‘Other Debt Obligations’ here refers to the principal and interest payments that you make on debts such as auto loans, student loans etc.
Now that we know what these ratios mean and how they are calculated, the obvious question is what is the ratio that you need to achieve in order to be able to afford a million dollar home. While different lenders have different requirements, a good gross debt service ratio is less than 39%. Similarly, a good total debt service ratio is generally under 44%.
Keeping all of the above in mind, the minimum annual income that you need to afford a million dollar home in Canada is…. *drumroll please*… around $176,000.
Another way that borrowers can afford a million dollar home is through something called the jumbo mortgage. As the name might give away, a jumbo mortgage is a mortgage that is larger than what most mortgage lenders will be comfortable lending. However, obtaining a jumbo mortgage is substantially more difficult than a conventional mortgage. This is because the level of risk for a one million dollar loan is also substantially higher than for, say a $300,000 loan, similarly the level of risk for a $3,000,000 loan is much greater than for a $1,000,000 loan. So before you start on the hunt for a jumbo mortgage loan, make sure you do your research on its specific requirements and whether it truly is the right product for you.
A million dollar home and even more so a multi-million dollar home is always desirable, but ensure that you have the financial capability and debt capacity to do be able to qualify for a mortgage. It is also worth considering upcoming future events. For example, you may have the income to service mortgage payments on a million dollar home today. However, if you are planning to have a baby or retire soon, this budget may change. Ensure that your income and cash flow will be sufficient through the life of the mortgage before making a giant commitment.