How to Calculate the Edmonton Home You Can Actually Afford

Buying a home can be incredibly exciting—but also stressful. Many first-time homebuyers and upgrading their home buyers run into financial troubles by overestimating how much house they can afford. Misjudging your budget could lead to overstretching your finances or struggling with mortgage payments. That’s why it’s critical to calculate your affordability realistically before signing on the dotted line.

This guide will walk you through the key steps to determine your Edmonton home-buying budget, mistakes to avoid, and tips to ensure your finances align comfortably with your dream home.

Understanding Your Income

Before calculating home affordability, you need to know exactly how much money you’re working with. This involves evaluating your monthly income.

For example, if you earn an annual salary of $70,000, divide this figure by 12 to calculate your gross monthly income, which equals $5,833.

Should You Use Net Income or Gross Income?

Using net income (your take-home pay after taxes and deductions) instead of gross income provides a more accurate picture of what you can realistically afford. While lenders may use gross income to determine mortgage eligibility, using net income ensures there’s room in your budget for other fixed and variable living expenses.

The 39% Rule: What It Means for Your Mortgage Payment

One of the foundational calculations in determining home affordability is the Gross Debt Service (GDS) ratio. This guideline suggests that no more than 39% of your income should go toward your housing expenses, including mortgage payments, property taxes, and utilities.

Example Calculation

• Monthly gross income = $5,833
• Maximum mortgage-related expenses = $5,833 x 0.39 = $2,275 per month

This means your total mortgage payment (principal, interest, taxes, and utilities) should not exceed $2,275 monthly.

But remember, housing-related expenses vary by location, so adjust accordingly. For instance, property taxes in Edmonton might differ significantly from those in outlying smaller towns.

Total Debt Service Ratio (TDS): Factoring in All Debts

Lenders also assess your Total Debt Service (TDS) ratio, which considers all your monthly debts in addition to your housing expenses. These debts could include student loans, car payments, and credit card balances. According to Canadian lending standards, your TDS ratio should not exceed 40-44% of your income.

Example Calculation

Imagine you also have car payments of $500 and credit card debt of $250 monthly. Here’s how your TDS calculation might look:

• Housing costs = $2,275
• Other debts = $500 + $250 = $750
• Total monthly debts = $3,025
• TDS ratio = $3,025 ÷ $5,833 = 51.8%

Since this exceeds the recommended 44%, you may need to reduce your non-housing debt to stay within a financially sustainable range.

Pro Tip: Prioritize paying off high-interest debts first to free up more room in your budget for housing costs.

Down Payment Requirements in Canada

Your down payment plays a significant role in determining both your home affordability and whether you’ll need additional costs like mortgage default insurance. Here’s how it works in Canada:

1. Homes priced under $500,000: Minimum down payment of 5%.
2. Homes priced between $500,001 and $1.5 million: Additional 10% on the portion above $500,001.
3. Homes priced at $1.5 million or more: Minimum down payment of 20%.

Example

For a $700,000 home:

• First $500,000 = $25,000 (5%)
• Remaining $200,000 = $20,000 (10%)
• Total = $45,000 down payment

The more you save for a down payment, the less you’ll need to borrow, which can significantly reduce your monthly payments.

Don’t Forget Mortgage Default Insurance

If your down payment is less than 20%, you’ll be required to pay for mortgage default insurance (commonly known as CMHC insurance). This expense is typically added to your mortgage payments.

The insurance premiums range from 2.8% to 4% of your loan, depending on your down payment amount. For example, a $700,000 home with a $45,000 down payment ($655,000 mortgage) could incur an additional $19,650 in insurance premiums.

While it increases your borrowing costs, mortgage default insurance can help you achieve homeownership sooner with a smaller down payment.

How Credit Scores Impact Interest Rates

One overlooked factor in home affordability is your credit score. A higher credit score unlocks lower mortgage rates, reducing your monthly payments and saving you thousands over the life of your loan.

• Good credit score (760+) = Access to the lowest advertised rates.
• Average credit score (650-759) = Higher rates, increasing monthly costs.
• Below 650 = Significant rate increases or reduced borrowing power.

Example of Rate Impact

On a $500,000 mortgage:

• At a 4% rate, monthly payments = $2,630.
• At a 5.5% rate, monthly payments = $3,067.

Improving your credit score before house hunting can make a substantial difference in affordability.

Leverage Mortgage Affordability Calculators

Many online tools make it easy to estimate your maximum home affordability. Platforms like Ratehub.ca’s Mortgage Affordability Calculator factor in essential variables like income, debts, and projected living costs.

By using these tools, you can obtain a realistic estimate of what you can afford and adjust your expectations accordingly.

Try Ratehub.ca's Free Calculator Here

Real-Life Examples

To bring it all together, here are two scenarios illustrating how different factors can affect home affordability:

Scenario A

• Annual income = $70,000
• Down payment = $30,000
• No debts
• Interest rate = 4%
• Monthly housing budget (GDS) = $2,275
• Approved price range = $350,000

Scenario B

• Annual income = $70,000
• Down payment = $20,000
• Car payment = $500/month
• Student loan = $300/month
• Interest rate = 5%
• Approved price range = $270,000

These examples underscore how non-housing debts and interest rates can influence your affordability.

Budget Smartly for Long-Term Stability

The key to buying a home you can truly afford is to ensure your budget includes room for future expenses, such as maintenance, unexpected repairs, or changes in income.

Action Steps:

1. Eliminate high-interest debt before house hunting.
2. Save for a larger down payment to reduce borrowing costs.
3. Use tools like Ratehub.ca’s affordability calculator for precise budgeting.

Buying your first home or upgrading your home can be a smooth and stress-free process with proper planning. Equip yourself with accurate numbers, educate yourself about lending standards, and stick to your budget to ensure the biggest investment of your life is a sound decision.