Can I afford this house?

How to make sure the biggest purchase of your life is the right one

This is one of the most common questions I get from physicians, and it’s surprisingly difficult to answer with a rule of thumb. The usual shortcuts like “no more than 30 percent of income,” “four times your salary,” or “the bank approved us, so it must be fine” are far too crude.

A home is often the largest financial decision a family makes. The only reliable way to know if you can afford one is to look at the full cashflow picture.

Let’s use a realistic example.

A couple earns $350k and $80k per year. They’re renting, have saved for a $300k down payment, and are trying to figure out what price range makes sense. On paper, this looks strong. But the numbers change quickly once you include taxes, mortgage costs, and the real expenses of home ownership.

Here’s how to approach the decision properly.

Start with after-tax income

This is the step most people skip. It’s a good idea to always think about your income in after-tax terms. Gross income tells you almost nothing about affordability.

A household earning $430k ($350k + $80k) does not have $430k to spend. After tax, CPP, EI, and typical savings contributions, the actual take-home amount is much lower — about $275k. That number — not the gross — is what must support everything: housing, children, transportation, food, and discretionary spending.

Without a clear after-tax number, nothing else can be assessed properly.

Run the mortgage numbers safely

Never rely on bank approvals. Lenders have definitions of “affordable” that maximize their profits and do not match what most families can afford in real life.

For planning purposes, I recommend running the numbers using a 15-year amortization even if you choose a longer one later. It gives a more realistic sense of the kind of home that won’t leave you feeling house-poor.

For example, on a $1.5 million home with a 20 percent down payment, the mortgage would be $1,200,000. Using current rates and a 15-year amortization, the monthly payment is much higher than most buyers expect — about $9,200. If this number feels tight, the home is likely too expensive.

But how do you know?

Include the full cost of ownership

New home owners often underestimate the extra costs that come with home ownership:

• Property tax — varies by municipality but usually ~1% per year.

• Home insurance — typically several thousand dollars per year.

• Maintenance and repairs — a major cost that is often ignored. A reasonable guideline is 1-2 percent of the home’s value per year. On a $1.5 million home, that’s about $22,500 annually. Not every year will be this expensive, but major repairs always come eventually.

• Utilities — often higher for larger homes.

These are unavoidable. If the numbers don’t fit comfortably into your after-tax income, the home is not affordable.

Think beyond today’s costs

Affordability is not just about whether the home fits your budget right now. You need to think about how your life might change as well.

If children are part of the plan, expect higher expenses: parental leave, daycare, reduced work hours, RESP contributions, extra food and activity costs.

If sabbaticals or parental leaves are in your future, plan for those.

A home that “barely fits” today will feel overwhelming once family expenses increase or incomes decrease.

Account for lumpy, intermittent expenses

Don’t forget about the big, irregular costs that hit every household:

• furnishings

• replacing vehicles

• family travel

• broken appliances

• roofs, driveways, HVAC systems

• unexpected repairs

These are not unexpected emergencies — they’re normal parts of life. A realistic affordability test includes a yearly amount for these items.

Consider your time horizon

Buying and selling real estate is expensive. Between commissions, legal fees, and other transaction costs, you can assume roughly 5 percent of the home’s value disappears with each sale or purchase.

Because of that, you need a long enough timeline for the math to work. If you’re not confident you’ll stay in the home for at least 5-10 years, renting is usually the better financial decision.

A simple affordability worksheet

Here is a fill-in-the-blank worksheet you can use. You don’t need perfect accuracy here, just honest numbers.

1. Annual after-tax household income (online calculator):

$ ______________________

2. Core housing costs (annual):

• Mortgage payment (15-year amortization): $ ______________________

• Property tax: $ ______________________

• Home insurance: $ ______________________

• Maintenance and repairs (1-2 percent of home value): $ ______________________

• Utilities: $ ______________________

Total housing costs: $ ______________________

3. Other essential expenses (annual):

• Groceries, transportation, childcare, etc.: $ ______________________

• RRSP / TFSA / other savings goals: $ ______________________

• “Lumpy” intermittent expenses (furnishings, travel, vehicles): $ ______________________

Total essential / recurring expenses: $ ______________________

4. Compare the totals

After-tax income: $ ______________________

Minus total housing costs: $ ______________________

Minus all other essential expenses: $ ______________________

Remaining surplus: $ ______________________

If the surplus is healthy and leaves room for flexibility, the home is likely affordable.

If the surplus is thin — or negative — the home is too much, no matter what the bank says.

A house should support your life, not strain it. The only way to be confident is to run the full cashflow picture with real numbers and clear eyes.