Here's What a $1 Million Mortgage Feels Like

What Does a $1 Million Mortgage Feel Like?

Average home prices in cities like Toronto, Vancouver and Victoria are now north of $1 million. Here's what it takes to qualify for and afford a $1 million mortgage — and risks buyers should consider in current market conditions.

Home prices have soared out of reach for many Canadians in recent years. In cities where average home prices are well north of $1 million, homebuyers are increasingly stretching their house-hunting budgets to the limit.

The average home price in Greater Toronto, for example, was around $1.11 million in October — up 45.5% from $758,600 in October 2018, according to the Canadian Real Estate Association’s (CREA) Home Price Index tool. Meanwhile, the national average home price in Canada was $656,625 in October, CREA reported.

What exactly does qualifying for a $1 million mortgage look and feel like? And in today’s turbulent economy and high-rate environment, is buying a home at that price point too risky?

Qualifying for a $1 million mortgage

Taking out a $1 million mortgage means the home’s purchase price is likely about $1.25 million. Canadian homebuyers purchasing a home that’s $1 million or more must make a 20% down payment, says Phil Allard, an Ottawa-based mortgage agent with the Chris Allard Mortgage Team.

Let’s crunch numbers with a mortgage calculator. The example below is based on a five-year, fixed-rate loan amortizing over 30 years.

$1M mortgage payment breakdown

Home purchase price	1,250,000
Down payment (20%)	250,000
Total mortgage amount	1,000,000
Interest rate	6.5%
Total monthly mortgage payment	$6,264

Cash needed to close

Down payment (20%)	$250,000
Land transfer tax (LTT)	$42,950
Lawyer fees	$1,000
Title insurance	$1,250
Total cash due at closing	$295,200

In the example above, to afford the down payment, land transfer tax and closing costs on a $1.25 million home, you’d need nearly $300,000 in cash or savings — an amount that’s likely to make most homebuyers break out in a cold sweat. While other parts of the country only require a provincial land transfer tax, Toronto homebuyers pay a provincial and municipal land transfer tax.

Additional housing costs, income needed for $1 million mortgage

But the total monthly mortgage payment calculated above is just the beginning. It doesn’t include property taxes, homeowners association or condo fees, homeowners insurance or utilities.

Nerdy Tip: With climate-related disasters becoming more common in Canada, personal property premiums have surged nationally, up 7.5% in the third quarter of 2023 compared to a year ago. In order to get a mortgage, most lenders require you to have a homeowners insurance policy — often covering the full replacement value of the property.

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

$1M Toronto mortgage breakdown

Monthly mortgage payment	$6,264
Property tax	$694 monthly (around $8,328 annually)
Homeowners insurance	$208 monthly (around $2,500 annually)
Utilities	$260
Cable/Internet	$105
Total monthly housing expenses	$7,531

To comfortably afford the monthly payment on a $1 million mortgage and the extra housing expenses outlined above, you’d need a gross annual household income of $260,000 or more, Allard says.

In high-cost areas like Toronto, experts often recommend you borrow no more than 4.5 times your annual income for a mortgage.

Regardless of loan amount, many mortgage lenders check that borrowers can pass a financial stress test to ensure they 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.

Risks to consider when taking out a $1 million mortgage

Aside from the steep expenses, buying a high-cost home comes with certain risks that homebuyers may be unaware of, Allard says.

“We’ve been in an environment for many, many years now that home values have been climbing rather rapidly, and there is a risk that home values will either plateau or could decrease rapidly,” Allard says.

Future mortgage rate movements present another risk. Because most fixed-rate loan terms are about five years, you’ll need to ensure you can afford higher monthly payments if rates increase by the time the loan renews, Allard points out.

“What if this is a normal interest rate moving forward? What if interest rates continue going up?” Allard says homebuyers should ask themselves. “What happens in five years when your fixed rate has to be reassessed and you end up with a higher than expected interest rate on renewal?”

Keeping these scenarios in mind, homebuyers need to have enough wiggle room in their monthly budgets (or increase their incomes over time) in case rates move higher in the future, he adds.

How to prepare to buy a $1 million home

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.