Anyone who’s looking to buy a home will ask how much mortgage can I afford? The answer isn’t always straightforward since it depends on various things such as your down payment, your income, and how much debt you have. Buying a home will likely be the largest purchase of your life, so you’ll want to know what affects housing affordability.
A quick way to figure out how much you can afford is to use an online mortgage pre-qualification tool. After inputting your data, you’ll instantly be given a calculation of how much you can afford.
If you want to take things a step further, you could get a mortgage pre-approval where the lender will verify your information and give you an actual commitment. Not only will you know how much lenders are willing to give you, but you’ll also know the interest rate so you can budget accordingly.
In Canada, you’re required to have a minimum down payment of at least 5% of the purchase price when buying a home. The bigger your down payment, the more home you can afford.
|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|
Mortgage loan insurance, which protects the lender if you default on the loan, is mandatory for buyers who put less than 20% down on homes that cost less than $1 million. So, depending on the price of your home, you may be required to save more than the standard 5% down payment to qualify. Your lender will arrange the insurance, but your loan application must fit the company’s eligibility requirements.
When deciding how much they’re willing to extend to you, lenders look at two major factors: your gross debt service (GDS) and total debt service (TDS) ratios.
Your GDS is calculated based on how much your housing expenses are relative to your pre-tax income. These expenses would include your mortgage, property taxes, heat and any maintenance fees for condominiums. Lenders don’t want this ratio to exceed 32% of your gross (pre-tax) income.
When it comes to your TDS, take your GDS and add any other outstanding debt payments that you currently have, such as student loans and credit card debt. Your TDS shouldn’t exceed 40% of your gross income.
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.
Anyone applying for a new mortgage or renewing their current loan will need to pass the government mortgage stress test. The way it works is like this. Currently, lenders use their own criteria when deciding how much to lend you and with what rates.
With the government stress test, you need to qualify under a different rule, which is the higher of the following:
What does this mean in practical terms? Let’s say your bank offers you a mortgage of 2.5% for five years. Under the stress test, you need to qualify with the assumption rates are actually 5.25%. This calculation is meant to protect you if interest rates rise, but it also lowers the total amount you can borrow.
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 think about the following things before you make a purchase.
As you can see, other expenses will come up, so you may not want to borrow the maximum amount offered to you. In an ideal situation, you’ll find a home that fits that budget you’ve created based on your goals.
» FIRST-TIME HOME BUYER? Check out our guide
Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.