A house or property purchase is often the biggest transaction people make in their lifetimes. The mortgage size people usually qualify for is often 3-5 times greater than their annual incomes.
Not only that, home prices in Canada have seen steady growth over the last decade. All of this might seem daunting at first. Home purchases are indeed expensive. The question is, how much can you afford?
What Is Mortgage Affordability?
Mortgage affordability refers to how much mortgage you can afford when you buy a home. It’s one of the first things you should figure out before you start house hunting. That way, you can avoid taking out a mortgage that may place a heavy burden on your finances.
Your mortgage affordability is based primarily on your income, monthly expenses, and costs associated with owning and maintaining a home. Calculating the maximum mortgage you can take out will also help ensure that you stay within your financial comfort zone by narrowing down your search to homes that fit within your budget.
How Much Mortgage Can I Afford In Canada?
Unless you have enough cash to purchase a home outright, you’ll need a mortgage. In this case, it’s important to understand how much you’ll be able to borrow, which will have an impact on the home price you can afford.
That said, the amount of liquid cash you have available to use as your down payment will also impact the price you can afford to pay for a home. The higher your down payment, the lower the mortgage amount you’ll need.
Use A Mortgage Affordability Calculator
A mortgage affordability calculator is a great way to quickly find out the maximum house price and mortgage you can afford Plugging in a few pieces of information will instantly tell you what your mortgage affordability is.
Before you use the calculator, be sure to have all relevant financial information handy, including the following:
- Annual income
- Household expenses (ie. utilities, property taxes, home insurance, etc)
- Monthly expenses (ie. groceries, credit card bills, car loan payments, gas, entertainment, etc)
- Mortgage information (purchase price of the home, down payment, interest rate, term, amortization)
With this information, you can calculate how much you can afford to borrow. You can also change different pieces of information — such as your amortization, term, purchase price, and down payment — to see how your mortgage affordability and monthly payments may change.
Big Bank Mortgage Affordability Calculators
Canada’s five big banks — TD, Scotiabank, RBC, CIBC, and BMO — have their own mortgage affordability calculators, each of which may differ slightly. Let’s take a closer look at each to find out what each bank’s calculator considers when calculating your mortgage affordability.
TD Mortgage Affordability Calculator
TD takes the following factors into consideration:
- Your annual household income
- Your down payment
- Your monthly debt payments (ie. credit cards, car loans, student loans, and personal loans)
- Your monthly bills and expenses (ie. groceries, transportation, insurance, and shopping)
- The location of the home you’re buying
- The home type (ie. detached or condo)
The TD mortgage affordability calculator uses the location of your home and the type of property to estimate your property taxes, utilities, and condo fees. The TD mortgage affordability calculator also calculates your maximum mortgage amount using the current qualification rate: a 39% maximum gross debt service (GDS) ratio and a 44% maximum debt service ratio.
Scotiabank Mortgage Affordability Calculator
Scotiabank takes the following factors into consideration:
- Your annual household income
- Your monthly debt payments (ie. credit cards, car loans, student loans, and personal loans)
- Your property taxes
- Heating costs
- Condo fees (if applicable)
Interestingly, Scotiabank’s mortgage affordability calculator doesn’t factor in your down payment amount. Instead, it determines your maximum mortgage limit and calculates the minimum down payment amount needed for a property with that mortgage amount.
Like the TD mortgage affordability calculator, the Scotiabank mortgage affordability calculator calculates your maximum mortgage amount using the current qualification rate: a 39% maximum gross debt service (GDS) ratio and a 44% maximum debt service ratio.
RBC Mortgage Affordability Calculator
The RBC mortgage affordability calculator takes the following factors into consideration:
- Your annual household income
- Your down payment
- Your monthly debt payments (ie. credit cards, car loans, student loans, and personal loans)
If you make a down payment less than 20% of the purchase price of the home, the RBC mortgage affordability calculator will also factor in your mortgage insurance premiums. Do note, that the RBC mortgage affordability calculator doesn’t factor in your location to calculate your property taxes or utility costs.
CIBC Mortgage Affordability Calculator
The CIBC mortgage affordability calculator takes the following factors into consideration:
- Your annual household income
- Your monthly debt payments (ie. credit cards, car loans, student loans, and personal loans)
- Your down payment
- Your property taxes
- Heating costs
- Condo fees (if applicable)
BMO Mortgage Affordability Calculator
The BMO mortgage affordability calculator takes the following factors into consideration:
- Your annual household income
- Your monthly debt payments (ie. credit cards, car loans, student loans, and personal loans)
- Your property taxes
- Heating costs
- Condo fees (if applicable)
Like the other big bank calculators, the BMO mortgage affordability calculator also considers your mortgage default insurance, your gross debt service (GDS) ratio and debt service ratio.
How To Calculate Your Mortgage Affordability
You need a sufficient income to cover your mortgage payments, but this debt is likely not the only payment you’ll have to make each month. Odds are, you have plenty of other financial obligations to cover, such as car payments, groceries, gas for your car, and so forth.
While a healthy income is certainly important, you’ll need to factor all of your debt into the equation to figure out how large of a mortgage you can actually afford. More specifically, there are two factors that your lender will look at and include in these calculations: your gross debt service ratio and total debt service ratio.
Gross Debt Service Ratio (GDS)
Your GDS ratio refers to your monthly housing costs (including your mortgage payments, property taxes, heating expenses, and condo fees, if applicable), divided by your gross household income.
To illustrate, let’s say your gross household income is $90,000 per year ($7,500 per month). If the home you plan to buy costs you $2,800 a month, your GDS ratio would come to 37.3% ($2,800 ÷ $7,500). According to CMHC, your GDS ratio cannot be any higher than 39%.
Total Debt Service Ratio (TDS)
The TDS ratio is also used to calculate your mortgage affordability and refers to the same housing expenses as your GDS, in addition to other expenses, such as car payments and other loan expenses, credit card interest, etc. The total of all this debt is divided by your gross household income.
For instance, if your household income is $90,000 per year, your housing costs are $2,800 per month, and all other expenses are $750 per month, your TDS ratio would be 47.3%. Your TDS ratio, according to CMHC, cannot be any higher than 44%.
In the example we just used, you’d be over that threshold, which means you may be at risk of having your mortgage application denied.
Stress Test and Mortgage Affordability
As of January 1, 2018, buyers and those looking to renew or refinance their mortgages must pass a mortgage stress test to get approved for a specific mortgage amount. Prior to this stress test rule, only borrowers with a down payment of less than 20% — referred to as ‘high-ratio’ borrowers — were required to undergo a stress test.
How To Pass The Stress Test
To pass the stress test, borrowers must qualify for a mortgage of a certain amount at the Bank of Canada’s qualifying rate, or the contractual mortgage rate plus 2%, whichever of the two is higher. As of June 2021, the minimum qualifying rate is now 5.25%, an increase from the previous 4.79%.
For example, if your lender offers you a rate of 3.45%, you’d have to qualify for your mortgage loan at a rate of 5.45% (3.45% + 2%), since that total is greater than today’s qualifying rate of 5.25%.
This test is designed to protect borrowers in the event that interest rates increase. You may be comfortable making mortgage payments at your current rate, but a slight increase in the near future could put you over the edge. However, the mortgage stress test also lowers your borrowing power. You may not be able to qualify for a higher loan amount because of this test requirement.
Down Payment Costs
If you’re applying for a mortgage, you still need to come up with a portion of the purchase price on your own. This is known as the down payment, and in Canada, the minimum down payment amount required is 5% of the purchase price of a home.
The following chart illustrates the minimum down payment requirements based on the price of the home:
| Purchase Price | Minimum Down Payment |
| Up to $500,000 | 5% |
| $500,000 – $999,999 | 5% for the first $500,000; 10% for the remainder |
| $1 million+ | 20% |
The higher your down payment amount, the more expensive the home may be. Alternatively, a higher down payment amount will reduce the overall amount you need to borrow.
Also, a down payment of at least 20% will help you avoid mortgage default insurance. This type of insurance protects the lender in case you fail to make your mortgage payments. But if you can muster up at least 20%, you won’t be subject to this additional charge.
Down Payment Amount And Maximum Mortgage
Your down payment amount can also impact how much mortgage you can afford. Aside from your income and debt, you can figure out how much you can afford with a simple equation. The following formula will show you the maximum home purchase price you can buy based on your down payment.
- For down payment less than $25,000, you can calculate the maximum home price with this formula: down payment ÷ 5% = max affordability
- Down payment of $25,001+, you can calculate the maximum home price with this formula: (down payment amount – $25,000) ÷ 10% + $500,000 = max affordability.
For example, if your down payment is $40,000, your maximum affordability would be calculated as follows:
($40,000 – $25,000) ÷ 10% + $500,000
= $650,000
In this case, your maximum affordability would be $650,000.
Additional Costs To Consider
In addition to your down payment and mortgage, there are other costs associated with buying a home that you should consider before signing a purchase agreement:
Closing Costs
Generally speaking, closing costs — which are fees owed at the time of closing of a real estate transaction — can add up to anywhere between 2% to 5% of the purchase price. These costs include any of the following:
- Lawyer fees
- Land transfer taxes
- Real estate commissions
- Title fees
- Survey fees
- Appraisal fees
- Property taxes owed to the seller
These costs must be paid upfront before the deal closes. That means you’ll need to have liquid capital readily available to cover these expenses before the deal is sealed.
Moving Costs
Whether you’re moving from an existing home into your new home or are starting from scratch, you’ll still need to fill your home with furnishings and all of your belongings. Unless you tackle this on your own with a few helpers, you’ll need to hire a moving company. And if you need to buy all new furniture, you’ll need to budget for this expense, too.
Additional Savings
You may have just enough money to cover your mortgage and all other costs that come with buying and owning a home, but you might want to have a little extra leftover to put towards other financial goals, such as saving for retirement, college tuition for your kids, an emergency fund, or even a vacation. Mortgage affordability calculators don’t take any other goals into consideration, so you’ll need to factor these additional savings on your own.
Household Budget
Mortgage lenders factor in pre-tax dollars when calculating mortgage affordability. But to make sure you’ve got money left over each month after your mortgage has been paid, you may want to use after-tax dollars for budgeting purposes.
Ways To Increase Your Mortgage Affordability
If you want to be able to afford a more expensive home, there are steps you can take to give your mortgage affordability a boost:
Increase Your Down Payment
If you have a little time before making a home purchase, make an effort to save up for a larger down payment. As mentioned, a higher down payment amount means you may be able to purchase a more expensive home. Otherwise, a bigger down payment means you won’t have to borrow as much.
A smaller loan amount means lower monthly payments and less interest paid over the life of your loan, which can potentially save you tens of thousands of dollars.
Lower Your Debts
Even with a healthy income, your mortgage affordability may not be as strong if you have a lot of debt that you’re still working to pay down. A higher debt load will increase your GDS and TDS, which can have a negative impact on your mortgage affordability and ability to secure a mortgage at all. Take some time to whittle down your debt before applying for a mortgage to increase your mortgage affordability.
Improve Your Credit Score
Your credit score plays a key role in your ability to get approved for a mortgage, as well as the interest rate your lender charges you. A higher credit score generally means a lower interest rate, so if you’re trying to reduce your overall mortgage amount, securing a low rate is highly effective. But you’ll likely need a higher credit score to enjoy a lower rate.
Before applying for a mortgage, pull your credit report to see where your score stands. If it needs improvement, take the following steps:
- Make more than your monthly minimum payment on your credit card bill
- Pay all bills on time
- Don’t apply for any new loans or credit in the months before applying for a mortgage
- Report any inaccuracies on your credit report
Choose A Longer Amortization Period
The amortization period refers to the amount of time you have before the entire mortgage must be fully repaid, including both principal and interest. The more time you have to pay off your mortgage, the lower your mortgage payments will be. As such, smaller payments will more easily fit into your budget, which can increase your mortgage affordability.
When applying for a mortgage, consider a longer amortization period, like 25 years. While you’ll end up paying more in interest overall, the smaller monthly payments will be much easier to handle.
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Bottom Line
When evaluating a prospective home purchase, you have more than just a few factors to consider. Undoubtedly the price of the property is highly important, but just as important is your credit score, your down payment, the mortgage rate, the term of the loan, your income level and your budget. When you make the decision to purchase a new home, make sure you take all of these factors into account.
