What Does a $1 Million Mortgage Feel Like?

Home prices have soared out of reach for many Canadians in recent years. In cities like Toronto and Vancouver, buyers often have to spend well over $1 million for a detached or even semi-detached property.

For most of us, that requires borrowing a ton of money.

What's involved with qualifying for and paying down a $1 million mortgage? In an unpredictable economy, is buying a home at that price point worth the risk?

If you're contributing the minimum down payment required (5% on the first $500,000 and 10% on the remaining amount), a $1 million mortgage would involve a purchase price of $1,075,000.

$1M British Columbia mortgage breakdown

Let's see what that looks like if we buy a home in British Columbia.

For this example, we'll use a mortgage with a 25-year amortization period — the longest you can get if you're putting less than 20% down — and a five-year fixed mortgage rate.

$1M mortgage payment breakdown

Cash needed to close

In the example above, to afford the down payment, land transfer tax and closing costs, you’d need nearly $96,000 in savings — an amount that’s likely to make most homebuyers break out in a cold sweat. And if that purchase took place in Toronto, you'd have to pay a municipal land transfer tax in addition to the provincial one.

The really scary number, though, is the monthly mortgage payment: $5,471. That's an astronomical amount for most Canadians to come up with every month.

The only way to reduce that mortgage payment would be to make a larger down payment. Putting down 20% would reduce your payment to just over $4,500. That's a little better, but your down payment would be about $215,000.

Regardless of the loan amount, many mortgage lenders will run you through a financial stress test to ensure you can keep up with payments, says James Harrison, president and founder of Mortgages.ca, a mortgage brokerage based in Toronto.

You must be able to afford monthly mortgage payments at the benchmark rate of 5.25% or the lender’s offered rate plus 2% (whichever is greater), he noted.

Harrison calls the stress test a “prudent rule” given how much rates have gone up in a short time in recent years. But it means million-dollar borrowers have to prove they can afford an even higher monthly payment than a lender might quote them.

$1M Vancouver mortgage breakdown

Here’s an estimate of how these items might add up on a $1 million mortgage in Vancouver:

To comfortably afford the monthly payment and additional housing expenses, you'd need to earn over $200,000 a year — and you'd still be putting about two-thirds of your income towards housing.

Additional housing costs, income needed for your $1 million mortgage

The mortgage payment isn't all you have to pay, either. It doesn’t include property taxes, homeowners association or condo fees, homeowners insurance or utilities.

Aside from the steep expenses, buying a high-cost home comes with certain risks that homebuyers may not anticipate, like falling home values and rising interest rates. The former can impact your net worth and ability to refinance, the latter can make renewing a mortgage a major challenge.

There's also the risk of funnelling all of your income into mortgage payments and bills and not having enough left over for emergencies, retirement planning or enjoyment. When buying a $1 million home, it can be a real all-my-eggs-in-one-basket scenario.

If homeownership doesn't pan out and you have to sell at a loss, you could walk away less wealthy and have missed out on years of saving or investing.

Before you go hunting for a high-cost home, it’s essential to get your financial ducks in a row. That starts with getting a mortgage pre-approval, says Sean Mayers, a real estate agent with Century 21 in Toronto.

“As a Realtor, when I’m working with new homebuyers, I want to ensure that they’ve already been pre-approved for a mortgage,” Mayers says. “That’s important because it sets the stage for the type of home, the budget and the location that we’d be searching for them.”

Mayers says he has seen homebuyers who assumed they could afford a $1 million mortgage sidelined after starting the shopping process because they couldn’t get pre-approved.

“Unfortunately, in today’s market, particularly in places like Toronto, it’s much harder to qualify for a mortgage for a first-time homebuyer because of increasing market rates,” he says.

Harrison agrees, adding that by getting pre-approved as soon as you’re thinking about buying, you’ll be able to identify any financial issues upfront that need to be addressed.

“[Then I can] prepare that client to buy, whether it’s giving them a strategy on savings, giving them a strategy on paying off some debt, cleaning up the credit or […] maybe going to get a gift from parents or getting a cosign,” Harrison says.

Whichever strategy buyers choose, Harrison suggests having it in place well in advance, so there’s a clear picture of what they’ll need to do to make the home purchase happen.