Mortgage payments: How much can you really afford each month?

This article has been updated from a previous version. 

When you’re ready to buy a home, think carefully about your costs. Instead of just looking at the mortgage you can get, start by figuring out what monthly payments you can afford.

Sometimes, you might get approved for a bigger mortgage than you can actually handle, which can put extra stress on your finances.

Here’s how to make sure your home purchase is financially sustainable:

Evaluate your overall monthly budget

Begin by examining your take-home pay. Financial experts traditionally recommended that mortgage payments, along with other housing expenses, should ideally be between 25-30% of your household’s net income.

However, factors like interest rates and inflation might change how well this rule works, so talking to a financial advisor is recommended to see what fits your situation best.

Lenders may also use the total debt service ratio, which pegs your total monthly debt payments against your household income.

While lenders may want to keep this under 30%, including a new mortgage, you'll want to look closely at how much of your take-home pay is going towards debt before taking on a new financial commitment.

Read more: A step-by-step guide to building a budget

Prepare for the unexpected

A mortgage is a long commitment. A lot can change over the life of your debt. If you have the maximum amortization term of 25 years – or 30 years for uninsured mortgages or insured mortgages held by first-time homebuyers -  there's plenty of time to face challenges.

Experts recommend having an emergency fund that can cover all of your expenses for three to six months in case you experience sudden loss of income from job loss or illness. You may want to save for even more, depending on whether you feel you can easily replace your lost income.

It’s also smart to keep an eye on interest rate movements, especially if you have a variable-rate mortgage. Knowing when to refinance or purchase in the first place can help keep your payments affordable.

In addition to making sure your income is enough to build up an emergency fund, you may want to take extra steps to protect your investment, such as checking if you need additional coverage for weather-related damage like flooding.

Life insurance or mortgage life insurance can also offer a safety net if you can’t meet your payments. These products can be lifesavers, but they also come at an additional cost—another factor to consider.

Related: Do you need life insurance? A primer for Canadians

Anticipate life changes

The high costs of buying a home, which include closing costs, are likely only worth it for people who intend to stay in their home for at least five years. But even if you plan to sell your home in the near future, it's important to think about other costs that may arise.

For example, if you don’t have children yet but plan to in the future, you might find that your income doesn’t stretch as far as your expenses grow. Without a buffer between your mortgage payment and your overall income, you could face financial shortfalls.

However, it’s not all doom and gloom. It’s about understanding what you and your family want for the future and planning how best to achieve it.

Start running the numbers

Mortgage figures can be confusing, but starting with the basics can help. Use our mortgage affordability calculator to determine what you can afford.

This tool estimates your monthly payments and includes extra costs like property taxes and insurance, which are important to your budget.

When you’re ready to look deeper, compare mortgage rates from different lenders.

By considering all the factors above, you’ll be better prepared to pick a mortgage that fits your financial goals and lifestyle.