How to purchase a home worth $1,000,000
Written by The Calgary Mortgages .CA Crew
In the 1990’s if you were purchasing a home with $1,000,000 you were looking at maximum luxury, today, $1,000,000 doesn’t quite get you what it used to!
In many cities in Canada, purchasing a home for a million dollars still means that you’re purchasing a luxury home. The big question would be: Can you afford it? Here are a few details that can help you know if a million-dollar home is feasible for you.
Let’s get to the point: Can you afford a million dollar home?
Answer: You can, if you have:
$1 Million Cash
Yearly income of at least $175,000 to $180,000 in order to pay off the monthly payment plus a cash down payment of $200,000.
A Million Dollar Home Today
Inflation has decreased the power of money over the years. $1,000,000 was worth much more to you in 1990, less in 2000 and less again in 2010 or 2020.
Here’s a brief detail of what $1 Million dollars today would be worth in previous decades:
2020 1,000,000
2010 851,311.95
2000 698,250.73
1990 572,157.43
Getting a Mortgage for a Million Dollars
If you’re like the average Canadian, you don’t just have $1,000,000 sitting in your bedside table, so you’ll likely need to obtain a mortgage for part of the price of the home. When you’re evaluating your eligibility for a mortgage, there are 2 main things to consider, down payment and debt service ratios.
1. Down Payment
Since you are aiming for a large mortgage amount, you will need to have a larger down payment. If you are purchasing a home over $1,000,000 you will be required to have a minimum down payment of 20% of the purchase price. Without 20% down payment, you will not be able to purchase a home over $1,000,000.
Down payments of less than 20% of the price of the home are required to have “default mortgage insurance,” insurance that protects the lender if a borrower defaults on their loan.
This is a high-ratio mortgage. Unfortunately, Canada Mortgage and Housing Corporation (CMHC), Genworth and Canada Guarantee (the default insurance companies) do not supply default mortgage insurance for any home price above a $1,000,000.
So a rough estimate of your costs will be $200,000 plus closing costs of $2000-$20000 depending on the province in which you live.
2. Debt Service Ratio
Debt Service Ratio or Debt-service coverage ratio is a measurement that lenders use to determine the eligibility of a borrower to cover or make the necessary monthly payments for a home. This can also determine the maximum mortgage that you can afford.
There are 2 equations set by the Canadian Government are used by lenders to know how much a borrower can afford for a loan: Gross Debt Service Ratio and Total Debt Service Ratio. Let’s break that down…
Gross debt service ratio
The gross debt ratio divides the monthly carrying costs of the home by your GROSS (before taxes) annual income. In order to qualify, anything under 39% will be ideal.
Here is the formula for a gross debt ratio:
Mortgage payments+ property taxes+ heating costs +50% of condo fees DIVIDED BY Annual Income
Running these numbers for a million dollar house, using 20% down payment and a mortgage of $800,000 ( $1 Million less the down payment) and getting the best mortgage rate which is 1.99%. This will lead to a monthly payment of $3,600. Let us see how we can use the formula with these data:
Expense | Monthly Expenses | Annual Expense |
Mortgage Payment | $3,383 | $40,596 |
Property Tax | $833 | $9,996 |
Heating Cost | $208 | $2,496 |
If your Annual Income is around $175,000 and using the formula, this is how it’s computed:
$40,596 (Mortgage payments) + $9,996 (Property Tax) + $2,496 (Heating Costs)
/ $175, 000 (Annual Income) = 30.33%
You will have a gross debt service ratio of 30.33 and will be able to qualify since it is less than 39%.
Total debt service ratio
The Total Debt Service ratio divides your TOTAL monthly payment by your gross (before taxes) income. The ratio must be less than 44% in order to qualify for the loan.
Here’s the formula for the Total debt service ratio:
House Expenses + Credit Card Interest + Car Payments + Loan Expenses Divided By Annual Income
To set an example, assume that here are your expenses and you have $176,000 as your annual income:
Expense | Monthly Expenses | Annual Expense |
Mortgage Payment | $3,383 | $40,596 |
Property Tax | $833 | $9,996 |
Heating Cost | $208 | $2,496 |
Student Loan | $600 | $7,200 |
Credit Card Interest | $600 | $7,200 |
Total | $5,481 | $67,488 |
$40,596 (Mortgage Payment) + $9,996 (Property Tax) + $2,496 (Heating Costs) + $7,200 (Student Loan) + $7,200 (Credit Card Interest) / $176, 000 (annual income) = 38.34%
You will have a Total debt service ratio of 38.34% and will be able to qualify since it is below the required 44%.
Looking at these calculations, your debt servicing ratios may suggest that you can afford a million-dollar home, but it doesn’t mean that you need to hastily get into a giant mortgage.
Bottom line
A million-dollar home requires a 20% down payment and strong income. It’s best to consult with a mortgage broker and lay out a monthly budget to make sure this is the right choice for you and your family.
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