Nerdy Tip: When using our mortgage affordability calculator, it helps to be accurate when estimating your monthly living expenses and additional spending. These aren’t expenses lenders typically look at when assessing mortgage affordability, but they’re important considerations if you really want to know how much mortgage you can afford.
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A guide to mortgage affordability in Canada
Answering the question “How much mortgage can I afford?” isn’t as simple as it might seem. Mortgage affordability depends on several economic factors — only some of which you can control — as well as Canada’s strict rules around mortgage lending.
If you’re aware of how mortgage affordability is determined, you can exert a little more influence over how much mortgage you may be approved for.
What is mortgage affordability?
When you calculate mortgage affordability, either by yourself or by using a mortgage affordability calculator, you’re answering the question “How much mortgage can I afford?”
Finding out how much house you can afford isn’t just a matter of subtracting a mortgage payment from your monthly income; you’ll also have to account for your debt load and credit history — which can both influence your mortgage rate — as well as the mortgage stress test and various closing costs.
Mortgage affordability vs. mortgage qualification
When trying to establish mortgage affordability, either on your own or by using an affordability calculator, keep in mind that the results may not be the same as what you qualify for at an actual lender.
Affordability is just one piece of the qualification puzzle.
For example, if you earn a high income and keep your additional spending to a minimum, but have a low credit score, lenders may not approve you for the mortgage you want. Instead, they may offer you a higher mortgage rate to hedge against the risk of dealing with someone with poor credit. That will increase the cost of your mortgage and reduce the amount you can borrow.
The only way to truly know how much mortgage you can afford is to let a mortgage broker or lender take a magnifying glass to your finances and tell you what they see.
More mortgage calculators to inform your home buying decision
Mortgage affordability factors
Lenders need to see that you’re earning enough income to make the monthly mortgage payment on the property you want to buy. That amount will vary from city to city.
For example, a $60,000 annual income might not get you far in Toronto, where a one-bedroom condo might cost more than $600,000. But if you’re buying in a small town or city in Saskatchewan, where the average price of a home is around $250,000, $60,000 a year should be more than enough to cover your monthly mortgage costs.
But income doesn’t just determine how much you can afford to put toward a mortgage each month. It also affects how much you’re able to save for a down payment. If your income, past or current, has prevented you from saving for a significant down payment, you might be surprised by how small a mortgage you’re legally allowed to apply for.
Down payment amount
In Canada, you’re required to have a minimum down payment of at least 5% of the purchase price when buying a home. But that’s only for homes valued at $500,000 or less.
For homes worth between $500,000 and $999,999, you’ll have to put 5% down on the amount up to $500,000 and 10% on the amount over $500,000. Homes worth $1 million or more require a down payment of at least 20%.
|Purchase price||Minimum down payment required|
|Less than $500,000||5% of the purchase price|
|$500,000 to $999,999||5% of the purchase price for the first $500,000; 10% for the portion above $500,000|
|$1 million or more||20% of the purchase price|
Depending on the price of the home, your income and the overall state of your finances, you may be required to put down significantly more than 5% to qualify for a mortgage on the house you want.Conversely, putting down a larger than required down payment can help you borrow less and qualify for the best mortgage rates.
Mortgage default insurance
If you aren’t able to make a 20% down payment on a home, you’ll be required to purchase mortgage default insurance, which protects your lender in case you stop making your mortgage payments.
Mortgage default insurance has a sneaky way of eroding affordability. Unlike home or car insurance, which are separate costs from the item being insured, mortgage default insurance gets added to your mortgage, so you also pay interest on your insurance premiums.
Buying a $500,000 home with a 20% down payment ($100,000) would free you from having to buy mortgage insurance. Your mortgage would be $400,000 plus interest charges. If you were to put down the minimum of 5% ($25,000), you’d be borrowing an extra $75,000 and be on the hook for a $19,000 mortgage default insurance premium. Your mortgage in this case would be $494,000 plus interest.
The larger your down payment, the lower your mortgage default insurance premiums — another reminder of how much your down payment savings can impact mortgage affordability.
The mortgage stress test
Applying for a new mortgage or renewing your current loan with a new lender will require passing the mortgage stress test.
With the stress test, it’s not enough that you qualify at your lender’s offered rate. You must be able to qualify at whichever of the following two rates is higher:
- A rate of 5.25%.
- The interest rate offered by your lender plus 2%.
If a lender offers you a five-year fixed mortgage rate of 5%, you actually need to qualify at 7%. If you can’t, you’ll be offered a smaller mortgage amount, which will decrease how much house you can afford..
The stress test is a major hurdle if you’re a first-time home buyer, especially when mortgage interest rates are high. But it’s meant to protect you by putting you into a mortgage you’ll be able to afford if rates rise faster than usual.
Debt service ratios
Lenders look at two major factors, your gross debt service (GDS) and total debt service (TDS) ratios, when deciding how much they’re willing to loan you:
- GDS is calculated based on how much your housing expenses — your mortgage, property taxes, heat and any maintenance fees for condominiums — cost relative to your pre-tax income. Lenders don’t want this ratio to exceed 39% of your gross (pre-tax) income.
- TDS uses your GDS and any other outstanding debt payments that you currently have, such as student loans and credit card debt. Your TDS shouldn’t exceed 44% of your gross income.
Nerdy Tip: When buying with a partner, lenders will look at your combined ratios as opposed to individually. What that means is that even if one of the purchasers has a GDS or TDS that exceeds the limit, you may still qualify for a mortgage as a couple.
Another measure lenders use to determine affordability is debt-to-income ratio (DTI), which measures what percentage of your income goes toward debt. In general, lenders typically want to see a DTI well below 50%, with ratios in the 30s being ideal.
To calculate your DTI, just divide your total monthly debt obligations by your gross monthly income.
Let’s say you earn $6,000 a month. Youspend $500 on a car payment and are applying for a mortgage that would cost you $3,500 a month. Your DTI would be an eye- watering 67%. It’s unlikely that a lender would approve you for a mortgage that leaves so little income for other expenses, like food and utilities.
Choosing a longer amortization period, or how long it takes you to pay off your mortgage in full, can assist in improving mortgage affordability — in the short-term, at least.
The longer you extend your amortization period, the smaller your monthly payments become. This can be a useful strategy for lowering your monthly mortgage costs, but it will result in a longer, more expensive mortgage due to the additional interest you’ll pay. You can use a mortgage amortization calculator to see the effects of different amortization periods.
Other mortgage affordability factors
While the above factors formally determine how much money you can borrow, they may not actually translate to what you can afford. It’s essential to budget for each of the following expenses, too:
- Closing costs. Generally speaking, you should set aside 1.5% to 4% of a home’s purchase price to cover closing costs, which include things such as legal and land transfer fees. A closing costs calculator can help get a better estimate of this expense.
- Maintenance fees. If you buy a condo or townhouse, you may have to pay a maintenance fee every month you own your property. Lenders factor some of these costs into their underwriting.
- Taxes and utilities. These annual and monthly costs, including property taxes and land transfer taxes, need to be accounted for.
- Commuting costs. If you choose to buy a house in a community away from the one you work in, you need to factor in the cost of getting to your job. Will you be filling up your gas tank an extra time or two a week? Will you be taking public transit? These costs can really add up.
- Moving costs. You might need to pay movers when you buy, and you may need to buy new household necessities like furniture.
- Personal spending. How much you spend on non-housing expenses — kids, fun, travel, shopping — may need to be adjusted if you plan on paying off a mortgage.
Because other expenses will inevitably come up while you own your home, you may not want to borrow the maximum amount a lender offers you. When determining your overall budget, consider using after-tax dollars to give you a more realistic idea of how much money you’ll have access to each month.
How to improve mortgage affordability
In many cases, improving mortgage affordability comes down to convincing lenders that you pose low risk as a borrower. Typically, the less risk a lender assumes, the lower the mortgage rate you’ll be offered.
Following these four steps can help increase affordability:
1. Have a steady, healthy income
Lenders need to see evidence that your income is both stable and sufficient enough to cover the cost of a mortgage. You can show proof of income using a letter of employment from your company and recent paystubs.
The longer you’ve been employed the better. Ideally, you will have at least two years of stable work history at the same company to prove your income.
Not all income will be equal in a lender’s eyes. It can be easier to apply when you have a salaried position as opposed to a self-employed income stream, although many B lenders can help self-employed home buyers get mortgages.
2. Have a strong credit score and credit history
Your credit score and credit history play a huge role in determining mortgage affordability.. A high credit score proves to lenders that you can reliably take on debt and pay it off consistently.
A high credit score also helps you qualify for the best mortgage rates. That’s why it’s advisable to take a peek at your credit score before reaching out to lenders to determine whether you should try to improve it.
Searching for a mortgage with a credit score below 600 could mean dealing with alternative or private lenders who typically charge far higher interest rates than chartered banks..
3. Boost your down payment savings
A 5% down payment doesn’t guarantee that you’ll be approved for a mortgage that works for you. Securing a lower rate and better loan terms may require putting down more than the minimum, depending on your credit history, income and overall debt load.
Even if all those indicators are flashing green, saving up a larger down payment will make you look like even less of a risk. Lenders may see you as someone who establishes financial priorities and understands how to save.
Paying off more of your home up front is just a good strategy, too. You’ll pay less in interest, and if the market goes sideways or some other event causes you to sell earlier than you anticipated, you’ll have more equity to lean on.
4. Pay down your debt
Coming to a lender with manageable debt service ratios can help you get offered a lower interest rate and secure a more affordable mortgage.
In order to qualify for a mortgage, your gross debt service ratio should be lower than 39% of your pre-tax income and your total debt service ratio should be under 44%.
Improving mortgage affordability if you’re a first-time home buyer
If you’re plotting out your first home purchase and are worried about how much house you can afford, familiarize yourself with the numerous programs that help first-time home buyers, including:
Estimating mortgage affordability
In addition to using a mortgage calculator, there are other ways to estimate how much mortgage you can afford. To start, you can use one of the following four methods:
- Use your down payment savings
Canada’s minimum down payment guidelines have a large say in how much you’ll be allowed to borrow.
If you have $25,000 saved up, that would be enough for the minimum 5% down payment on a home worth $500,000 or less. If you’ve saved less than that, you’ll only be able to put 5% down on a home worth less than $500,000.
To find out how much house you can afford, multiply your 5% down payment by 20 to find the price of the home you’ll be able to buy (5% down payment x 20 = 100% of the home’s price).
If you’re planning on buying in an area where homes are typically valued at $1 million or more, you’ll need a down payment of 20%, which will be at least $200,000. If you’ve saved more than that, you can multiply the amount you’ve saved by five (20% x 5 = 100%) to determine your maximum home price.
If your savings are between $25,000 and $200,000, your maximum mortgage amount will fall between $500,000 and $999,000. To find out how much house you can afford in this scenario:
- Start by finding a home you like in this price range.
- Multiply the first $500,000 by 0.05 and the remaining amount by 0.1.
- Add those numbers together. That’s the minimum down payment you’ll need to purchase this property.
- Use your debt service ratios
A more math-intensive way of estimating affordability is to apply the debt service ratios lenders use to your own finances. To do these calculations, you’ll have to input amounts for the mortgage principal and interest charges:
- For GDS, add up the monthly mortgage cost (principal and interest), property taxes and heating costs. Divide that figure by your gross monthly income.
- For TDS, add up the monthly mortgage cost, property taxes, heating costs and your other debt obligations. Divide that number by your gross monthly income.
Let’s look at an example. You have a monthly income of $5,000 and $50,000 in down payment savings. You want to buy a house that costs $250,000. To determine how much mortgage you might qualify for, lenders would consider your financial obligations, such as:
- Estimated heating costs: $150/month.
- Estimated property taxes: $200/month.
- Monthly credit card payments: $100/month.
- Monthly car payment: $350/month.
In this simplified scenario, you will likely be able to afford this home. You should qualify for the needed mortgage amount of $200,000, since your GDS ratio (30.84%) does not exceed 39% and your TDS ratio (39.84%) does not exceed 44%.
Nerdy Tip: If your GDS calculation doesn’t exceed 39% and your TDS is lower than 44%, you can recalculate using higher mortgage costs until you hit those limits.
- Get prequalified for a mortgage
Mortgage pre-qualification is a fairly casual process, often done online, that works an awful lot like a mortgage affordability calculator. You provide some general financial information and a lender tells you how much they might be willing to loan you without performing a hard credit check.
Because pre-qualification is simple and quick, the amount you’re pre-qualified for is intended as an estimate. It might be identical to the amount you ultimately get approved for, but there’s no guarantee. That’s what pre-approval is for.
- Get pre-approved for a mortgage
With a mortgage pre-approval, a lender will take a much closer look at your finances and provide an actual mortgage offer, including a principal amount and interest rate, that will be in effect for up to 120 days.
With pre-approval, you’ll be asked to provide several documents, including banking and employment information, that your lender will then verify. You’ll also have to consent to a hard credit check so your credit score and credit history can be evaluated.
It’s a lot more work than a mortgage pre-qualification, but pre-approval is a necessary step in the home buying process. Once you’re pre-approved, you’ll be able to bid confidently on a home that you know you can afford.
Common questions about mortgage affordability
Can I use my RRSP to buy a house?
With the Home Buyers’ Plan (HBP), you can use up to $35,000 of your RRSP savings to help fund your first home purchase. The HBP can significantly increase your down payment, which will improve affordability.
What’s the difference between a high-ratio mortgage and a low-ratio mortgage?
If you have to borrow more than 80% of a home’s purchase price, you will need a high-ratio mortgage. A low-ratio mortgage involves a home loan worth less than 80% of a home’s purchase price.
Low-ratio mortgages will generally be more affordable since you’ll be borrowing less money and won’t have to buy mortgage default insurance.
How much of my salary should go toward a mortgage payment?
It’s recommended that no more than 32% of your gross salary should go toward housing expenses, including your mortgage principal and interest, property taxes, heating and, if applicable, half of your monthly condo maintenance fees.
Some might refer to this figure as your “mortgage-to-income ratio,” but it’s also similar to how lenders calculate your GDS ratio.
Will a mortgage affordability calculator tell me how much mortgage I’ll be approved for?
A mortgage affordability calculator will not tell you exactly how much mortgage a lender will ultimately approve you for. That’s because lenders look at factors like your credit score before determining what mortgage interest rate to offer you. The interest rate greatly influences the overall cost of your mortgage.
A mortgage affordability calculator also can’t perform a stress test or assess any past blemishes that might be on your credit report. Only mortgage professionals can do that.
Why should I use a mortgage affordability calculator?
Even though a mortgage affordability calculator won’t tell you the exact amount a lender might loan you, it can still be a useful tool. If a calculator gives you a result that doesn’t align with home prices in your area, it could be a sign that you need to save a larger down payment or pay down some of your debts.
And if a mortgage affordability calculator shows that you can afford a mortgage big enough to cover the cost of homes you’d like to buy, you’ll know that you’re probably on the right track. It might even be time for you to get pre-approved.
How much mortgage you can afford: Examples
Here are two simple scenarios that can help you understand how the various factors we discussed above impact how much mortgage you can afford.
You have a monthly income of $5,000 and $50,000 in down payment savings. You want to buy a house that costs $250,000. To determine how much mortgage you might qualify for, lenders would consider your financial obligations, such as:
- Estimated heating costs: $150/month.
- Estimated property taxes: $200/month.
- Monthly credit card payments: $100/month.
- Monthly car payment: $350/month.
In this simplified scenario, you will likely be able to afford this home. You should qualify for the needed mortgage amount of $200,000.00, since your GDS ratio (30.84%) does not exceed 39% and your TDS ratio (39.84%) does not exceed 44%.
You have a monthly income of $5,000, with $35,000 in down payment savings. The home you want to buy costs $350,000. Your financial obligations are the same as in Scenario 1.
In this simplified scenario, you’ll likely be denied the necessary mortgage amount of $324,765 ($315,000.00 + $9,765.00 in mortgage insurance premiums because your down payment is less than 20%), because your GDS ratio (45.71%) exceeds 39% and your TDS ratio (54.71%) exceeds 44%.
Frequently asked questions about mortgage affordability
In addition to income, how much mortgage you get approved for depends on the size of your down payment, your credit score and how much debt you’re carrying. A borrower earning $100,000 with a 640 credit score, a $10,000 down payment and $15,000 in credit card debt, for example, would probably be approved for less than someone earning $100,000 who has a credit score of 740, access to a $75,000 down payment and no credit card debt.
Assuming you have no debt, a healthy down payment and have been offered a low interest rate, you might be able to purchase a home worth six times your income. A 4% interest rate, $100,000 income and a $50,000 down payment, for example, might allow you to afford a home worth around $617,000. Lenders may not, however, be willing to qualify you for a mortgage worth more than five times your income.