How much money do you have to make to afford a $1-million home?

By: Jessica Mach on March 16, 2018

Oh, Toronto housing.

Up until recent years, hopeful homebuyers in Toronto would often start their housing journey by scooping up a starter home. In many cases, they could get a single-detached home with a few bedrooms and a spacious backyard.

But then, due to demand and a host of other reasons that everyone is still trying to suss out, detached home prices shot up to a realm that is wholly unaffordable for most. The average house in Toronto now sits slightly north of $1 million.

So, are your dreams of owning your own house over? Well, it depends on how much you make.

Below, we break down exactly what salary you have to take home to buy a $1 million house in the city.

The breakdown

Home price: $1,000,000
Down payment: $200,000, or 20% (in Canada, homebuyers are required to pay a minimum 20% down payment for homes worth $1,000,000 or more)
Mortgage loan insurance: $0 (when you put down a down payment of 20% or more, you do not have to buy mortgage loan insurance from the Canada Mortgage and Housing Corporation)
Amortization period (the maximum amount of time your lender will give you to pay off your loan): 30 years
Payment frequency: Monthly

Keep in mind that our calculations don’t take maintenance fees into account, which is a cost you’ll have to take on if you buy a condo.

It’s also important to know that under the new B-20 rules, lenders must now stress test all buyers to ensure they can afford to pay their mortgages if interest rates rise (those renewing only have to do a stress test if they change lenders). The stress test requires you to show you can handle rates at the five-year Bank of Canada benchmark rate (5.14%) or two percentage points above the rate you qualified for (whichever one is higher).

Now that that’s out of the way, let’s break down what you need to make to afford that $1 million home.

If you go with a fixed-rate mortgage

When you get a fixed-rate mortgage, your interest rate on the mortgage will stay the same throughout the length of each payment term — which, in this case, spans five years.

Now, in Canada, on insured mortgages, you can only get a 25-year amortization period (essentially the length you have to pay off your mortgage). However, because you need to put down 20% on a home worth $1 million or more, that allows you to stretch your amortization to 30 years.

Based on that, we’ve come up with the number below using the LowestRates.ca mortgage calculator.

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Mortgage rate: 3.03%
Mortgage: $3,378/month
Property taxes: $6,879.73/year, or $573.31/month (we used the City of Toronto’s property tax calculator)
Utilities: $100
Total: $4,051.31/month, or $48,615.72 annually

When you apply for a mortgage, most brokers will provide you with a mortgage that caps your debt-service ratio for the mortgage at 39% of your income. Plus, you’ll be stress tested at a higher rate of 5.14% to ensure you can afford your mortgage.

That means you have to prove you can afford a mortgage, plus the payments above, of $5,010.31. Based on the 39% debt service ratio, you need to make at least $154,163.38 before taxes a year to finance the purchase of a $1,000,000 home with a fixed-rate mortgage.

Income needed: $154,163.38 before taxes
Monthly payment once you qualify: $4,051.31

If you go with a variable-rate mortgage

A variable-rate mortgage moves with market interest rates. This means that the interest rate you’ll be paying on your mortgage will fluctuate depending on how the market moves — you could either end up paying less than you would with a fixed-rate mortgage. Or you could end up paying more.

Mortgage rate: 2.20%
Mortgage: $3,034/month
Property taxes: $6,879.73/year, or $573.31/month
Utilities: $100
Total: $3,707.31/month, or $44,487.72 annually

If you apply the 5.14% stress test, based on a 30-year amortization, you’ll need to make at least $154,163.38 before taxes to finance a $1,000,000 home if you get a variable-rate mortgage.

Income needed: $154,163.38 before taxes
Monthly payment once you qualify: $3,707.31

Final verdict

In case you missed all that, you need to make $154,163.38 right now to qualify for a mortgage on a $1-million home.

The median income for a family in Toronto, according to Statistics Canada, is $78,280. So you essentially have to make double that to qualify for a mortgage that can get you the average house in the city.