The amount of money you can afford to spend for a new home is determined by two factors:

1. Your downpayment.

This is the amount of money you have available from your own assets. You need a minimum of 5% of the total purchase price as a downpayment.

A larger downpayment means lower mortgage payments or, even better, that you can pay off the mortgage faster, thereby saving thousands of dollars in interest payments. Or you may be able to buy in a higher price range, if you qualify. (Be careful, though, not to stretch your budget to the limit, and to set enough money aside to cover the other expenses of buying a home.)

First time home buyers can use their RRSPs towards a downpayment and closing costs. Under the federal government's Home Buyer's Plan, first-time buyers can borrow up to $25,000 tax-free ($50,000 for couples) from their RRSP savings. The funds must be repaid within 15 years, but you don't have to begin repayments for two years.

2. Your ability to carry mortgage debt.

Lenders use a simple two-step method to determine the mortgage amount that you can comfortably pay back on your income. As a rule, you can use no more that 32% of gross income on monthly payments to cover principal, interest, property taxes and heating (PITH) and possibly condominium fees, or 40% of gross income on all financial obligations. The latter could include car payments, credit card installments and other payments in addition to the "shelter" costs listed earlier.

Once your maximum monthly payment towards "shelter costs" has been established, it is easy to determine the size of loan you can handle, depending on interest rates and amortization periods.

Be aware of the total costs

When you calculate how much it will cost to buy a home and how much you can afford, don't forget to consider the additional costs that you may encounter. Ask your builder and the sales representative for detailed estimates, and consult with your lender and lawyer for further information.

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