This is the most useful hour you will spend before you start looking, and almost nobody spends it. Done properly it makes everything afterwards easier: you search in the right range, you write offers with confidence, and you move into a house you can enjoy rather than one you are servicing.
The good news up front. Most people who do this exercise find they can buy something perfectly good. What changes is that they buy it on purpose.
Two numbers, not one
What a lender will approve
Calculated from your income, your debts, and the stress test. It is a ceiling, and lenders are in the business of lending. It knows nothing about your childcare costs, your travel, your retirement saving, or how you would like to spend your thirties.
What you can comfortably carry
Your own number, worked out from what your life actually costs. It is almost always lower, and it is the one that determines whether you enjoy the house. Set it before you look, and write it down.
The mortgage payment and affordability calculator gives you the lender's ceiling and the monthly payment side by side, so you can see the gap between them before you decide what to do about it.
The stress test, and why it is on your side
Lenders must qualify you at the greater of your contract rate plus two per cent, or 5.25 per cent. So a mortgage at 4.5 per cent is approved as though it were 6.5 per cent.
Everybody experiences this as an obstacle, and it is worth reframing. It is a rehearsal. The test is asking whether you could still make the payment if rates moved against you, which is the exact question you should be asking yourself. If the answer is uncomfortable, that discomfort is information arriving early, when it is free.
Run your own numbers at two points higher than you are paying, and look at the monthly figure honestly. Someone with a $700,000 mortgage who sees their rate rise by two points is looking at roughly $800 more a month.
If that number is survivable, a variable rate is a reasonable risk to take. If it is not, take the fixed rate and sleep. The premium you pay for a fixed rate is buying something real.
The down payment
Five per cent on the first $500,000 of the purchase price.
Ten per cent on the portion between $500,000 and $1,500,000.
Twenty per cent on any home priced above $1,500,000, at which point mortgage insurance is not available at all.
Below twenty per cent you pay mortgage default insurance, a premium of roughly 2.8 to 4 per cent of the mortgage, added to the balance rather than paid up front. It insures the lender, not you. It is also the mechanism that lets people buy years earlier than they otherwise could, which for most buyers is worth more than the premium costs.
The costs that catch people out
None of these are hidden exactly. They are simply not in the listing price, and they arrive together.
Closing costs, typically 1.5 to 4 per cent of the purchase price: land transfer tax (twice, in Toronto), legal fees, title insurance, adjustments, and a home inspection. On a $900,000 Toronto purchase the land transfer tax alone comes to about $28,950, before any first-time buyer rebate. See Closing Costs and the land transfer tax calculator.
Condo maintenance fees, if you are buying a condo. Commonly $0.70 to $1.00 per square foot per month, so $700 to $1,000 on a 1,000 square foot unit. They rise. They are not optional, and a lender counts a portion of them against your borrowing power, so a high-fee building genuinely reduces what you can buy.
Property tax and insurance, month in and month out, alongside the mortgage.
Utilities on a freehold house, which surprise people moving out of a condo or a rental where heat was included. Budget generously for the first winter.
Ongoing maintenance. Roofs, furnaces, windows and water heaters all have a lifespan, and on a freehold house they are yours. A common rule of thumb is one per cent of the home's value a year, averaged over the long run. Some years it is nothing and some years it is a $14,000 roof.
Two things to budget for that nobody tells you to
An emergency buffer
Three to six months of full carrying costs, kept liquid and separate, untouched by the down payment. This is the difference between a broken furnace being annoying and a broken furnace being a crisis. If buying the house would consume this entirely, you are buying too much house.
Capital to improve the place
Almost every buyer wants to change something in the first year: paint, floors, a kitchen, a bathroom. Doing it before you move in is cheaper and far less disruptive than doing it around your own furniture. Buyers who spend every last dollar on the purchase end up living with the previous owner's choices for years.
What being over-leveraged actually feels like
Not dramatic. It rarely ends in foreclosure. It looks like declining a wedding invitation abroad, putting off a car repair, feeling a rate announcement in your stomach, and slowly stopping saving for anything else. The house becomes the only thing your money does.
The genuine risk sits at renewal. Buy at the absolute edge of what you qualify for and you meet your renewal in five years with no cushion, at whatever rate exists then. Buyers who left themselves room absorb it. Buyers who did not have to make decisions in a hurry.
Take the maximum the lender offers and look hard at eighty to ninety per cent of it. That gap is your renewal cushion, your emergency buffer, your new kitchen, and your ability to say yes to things.
In the GTA that might sound like a lot to give up. In practice it is often the difference between a house on a street you love and a slightly larger one you resent.
Get pre-approved, properly
A pre-approval is not a formality and it is not the same as a rate quote. A real one means a lender has seen your income documents, pulled your credit, and told you what they will actually lend.
It sets the search range honestly, so you do not spend two months touring homes you cannot buy or, just as commonly, homes well below what you could have had.
It holds a rate, usually for 90 to 120 days. If rates rise while you are looking, you keep the lower one. If they fall, you get the lower one. It is a free option.
It is what makes a competitive offer possible. On offer night, a firm offer wins over a conditional one at the same price, and the only responsible way to write a firm offer is to have your financing genuinely sorted first. See Offer Night.
Between pre-approval and closing, keep your finances still. No new car loan, no new credit card, no changing jobs if you can help it, and no large unexplained deposits into your account. Lenders re-check before funding, and a deal that was firm on Friday can be in trouble on Monday.
If a gift from family is part of your down payment, tell your lender early. They will want a signed gift letter and to see the funds land. It is routine, and it is only a problem when it is a surprise.
Where to start this week
- Add up what you have available, and subtract the emergency buffer and the improvement money before you call it a down payment.
- Run the mortgage payment and affordability calculator at your likely rate, then again at two points higher.
- Add property tax, insurance, utilities and any condo fees to that monthly figure. That is the real number.
- Speak to a broker or your bank and get a proper pre-approval in writing.
- Then, and only then, start looking.
I would rather have this conversation with you six months before you buy than two weeks before. It costs nothing, there is no obligation, and it is far easier to build a plan than to unwind a decision.