When you bought your first home, it was so exciting. When you got the keys and opened the door for the first time, it was like opening the door to your own private kingdom.
But as the years went by, your kingdom started feeling a little cramped. Food has found a home on the kitchen counter because the cabinets are full. The tiny laundry pair in a closet once promised the end of laundromat trips forever but, instead, turned laundry into a days-long chore. And all of the extra space you once had has filled up with stuff (or maybe even kids).
Meanwhile, your life has changed since you became a homeowner. Chances are the value of your home increased handsomely. You might be making more money than you were then, too. And maybe all of this has led to you dreaming of buying a bigger home.
But can you afford it? Let’s find out.
Your down payment might be smaller than you think
To buy a bigger home, you’ll need to qualify for a mortgage just like you did the first time. The lender will examine your debt service ratio, which compares your income to your cost of living (mortgage payments, property taxes, and heating costs). This ratio can be no higher than 39%, and with all your other debts added in, it can be no higher than 44%.
The mortgage payment portion is determined primarily by two factors: the cost of the home and the size of your down payment. The mortgage rate, while important for your actual budget, is no longer a consideration for affordability. Thanks to the mortgage stress test, you’ll have to qualify at a higher rate even if you get one of the best mortgage rates in Canada.
Your down payment depends on the sale price of your existing home, less expenses. A typical real estate commission is 5% of the sale price (plus tax, depending on your province). Closing costs range up to 1.5% of the purchase price of your new home on the high end. And land transfer taxes for your new home could cost in the neighbourhood of 2-3% of your purchase price.
All told, if you are selling your home for $400,000 to buy a home for $800,000, you’ll spend anywhere from $33,250 (this assumes a purchase in sale and purchase in a market like Kelowna, BC with typical closing costs around $3,500) up to $59,550 (assuming high closing costs and Toronto’s extra-high land transfer tax).
Additionally, you’ll need to subtract the balance owing on your mortgage. If you still owe $200,000 on your mortgage, you’ll be left with about $140,000 for your down payment. ($400,000 sale – $200,000 mortgage – $60,000 expenses = $140,000). That’s not enough for a full 20% down payment on an $800,000 home, so you’ll have to decide between purchasing mortgage insurance, making up the difference from another source of funds or choosing a less expensive property.
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First-time homebuyer programs are no more
When you bought your first home, there were lots of incentives for first-time homebuyers to take advantage of. You probably got a healthy rebate on the land transfer tax, and after the dust cleared, you got to claim the Home Buyers’ Amount for a cool $750 off your income taxes.
You also had the option to participate in the Home Buyers’ Plan (HBP) and take money out of your RRSP to buy a home. If you bought your home with a partner, you might have withdrawn as much as $50,000 between the two of you. (Note, the HBP now allows first-time homebuyers to access $35,000 each). Even if you’ve been repaying it faithfully, you might still owe yourself a lot of money.
The good news is you don’t have to repay your HBP withdrawal when you sell your home. But you’ll still have to keep making your annual repayments. You could also choose to use the sale of your home to repay the entire amount owing at once. If you do, the downside is that money won’t be available for a down payment on your next home.
You might need to take bridge financing
In many cases, the sale of your current home will close after the purchase of your new home. And that means you may need a special loan called a bridge to cover the down payment and closing costs for your new home while you wait for your sale to complete.
Bridge financing is extraordinarily expensive. If you buy a home for $800,000, you might need to borrow as much as $172,000 to cover your down payment and closing costs. With typical bridge financing rate of the prime rate + 5%, your cost of borrowing will be about $42 a day, or just shy of $300 a week.
And then you have to move
Even in-town moves can be costly. Whether you hire a moving company to do it for you, or bribe your friends with pizza and beer, expect to spend a minimum $1,000 to get yourself and your stuff to a new home.
So, can you afford it?
To find out if you can afford the bigger home you’ve been dreaming of, follow these steps:
- Use a mortgage affordability calculator to find out how much you can afford to borrow based on your income. If the purchase price is lower than you’d hoped for, you’ll have to make up the difference with your down payment.
- Determine the down payment you’ll have after you’ve paid for all of these expenses using this table.
|Estimated sale price (tools like Zoopraisal can help you estimate the value of your home)|
|–||Outstanding mortgage balance|
|–||Real estate commission (typically 5%)|
|–||Tax on real estate commission|
|–||Lawyer fees and adjustments (typically $3,000 – $5,000 for a sale and purchase)|
|–||Land transfer tax on new home|
|–||Debt elimination (optional)|
|–||Surprises (budget $5,000 at least)|
If the amount left for a down payment is above the minimum down payment you determined in step 1, you might be able to afford to move to a bigger home. That’s especially true if you have a comfortable margin.
If the amount left for a down payment is less than you need, or if it’s too close for comfort, you might want to rethink your plans. You can choose to look for a less expensive home, attempt to increase your income, or wait a while to build more equity in your current home.