How much house can you afford?

If you're thinking about buying a home, there are more costs to consider than just the list price.

Rachel Haig 30 August, 2010 | 6:00PM
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Just because you qualify for a mortgage at a given dollar amount, it doesn't mean you should actually borrow that amount. But determining how much is prudent to borrow for a house is all but straightforward. Turning to your realtor for help in this area can be dicey because real estate agents are typically paid a percentage of the purchase price and thus have an incentive to push a higher price range. Settling on an affordable amount requires looking beyond the list price to consider less obvious costs and your broader financial situation.

A generally accepted rule of thumb recommends that fixed housing costs should not exceed 30% of your gross income. However, many homebuyers underestimate the costs they should include when considering the cost of their home relative to their income.

Furthermore, this rule of thumb assumes a stable flow of income, but many homebuyers' income streams fluctuate. If your income is largely contingent on bonuses, for example, think beyond how much you are making this year to consider what average and lean years will look like. Will you be able to pay your mortgage and other property costs if you're unemployed for six months or longer? Will you be able to afford to set up an emergency fund and comfortably save for retirement and other goals while simultaneously handling all of these payments? Borrow an amount that leaves you with some wiggle room.

Calculating monthly mortgage payments is simple with the many calculators available online, such asthis one from the Royal Bank. (But other costs, such as property taxes and home repairs, are less obvious and trickier to predict. Below are some costs to consider beyond the sticker price.

Closing costs

You've scraped together money for a down payment, but there are still a few thousand dollars between you and home ownership. In order to complete the purchase, you'll need to pay closing costs, such as loan-origination fees, title fees, appraisal fees, and attorney fees. According to Canada Mortgage and Housing Corporation, a minimum of 1.5 % of the purchase price should be set aside for closing costs. Closing costs aren't recurring, unlike the ones below, but they're still worth considering when gauging the affordability of a given home.

Property taxes

Look at your municipality's property records to see a property's assessed value and get a sense of what the previous owner paid. It's harder to estimate taxes if you are buying a new property. Each year the City of Edmonton does a survey on property taxes in major Canadian cities; the 2009 survey found, among other things, that residents of Toronto and Montreal paid an average of nearly $3,000 in property taxes on a three-bedroom bungalow.

Another way to come up with a rough estimate is to assume annual property taxes of 1.5 % of the purchase price. Actual taxes will vary by city and the assessed value of the property.

Home repairs

Even new homes will inevitably require work, with some projects carrying shockingly high price tags. According to Remodeling magazine for example, replacing windows will cost more than $10,000, and a new roof can run nearly $20,000. Aside from big-ticket items, maintenance projects can also add up. Repainting can range from a few hundred dollars to a few thousand dollars depending on if you do it yourself or hire professionals. Houses come with an array of potential costs that apartments don't: You'll have to pay for a plumber or electrician if there is an issue you can't fix yourself, and you could end up needing to replace expensive appliances such as the furnace or water heater. Realtors suggest estimating annual repair costs at 1% to 4% of the purchase price, but annual outlays will vary widely.

Homeowners insurance

According to Statistics Canada, the average household pays $695 a year in homeowners insurance. However, keep in mind that costs do vary between provinces, depending on where you live, what you want insured and how big the policy is.

Utilities

Your monthly utility bill is likely to be approximately $420, broken down as follows: $45 for home phone service, $65 for television and $40 for high-speed Internet (these are the costs of Bell Canada's medium packages in each of these categories); $170 a month for electricity and $100 a month for natural gas (the averages for Ontario households according to energyshop.com). Of course, utility bills can vary depending on where you live. For example, a resident of Quebec City will likely have higher heating costs in the winter than someone who lives in Vancouver.

Condo fees

Don't forget to factor in maintenance fees if you purchase a condo or a home in a subdivision. These can vary widely, from $100 to over $1,000 per month depending on the home and the amenities to which the fund contributes.

Mortgage Insurance

If you put less than 20% down, your lender will require you to pay for mortgage loan insurance, which generally ranges from 0.5% to 2%. Canada Mortgage and Housing Corporation has a chart indicating the premiums you will pay depending on your down payment. Of course, this expense is avoidable by only taking out a loan when you can afford to make a 20% down payment.

-with files from Ashley Redmond

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Rachel Haig

Rachel Haig  Rachel Haig is assistant site editor for Morningstar.com.

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