Mortgage Affordability

Before you start to look for your dream home, you should find out how much you can responsibly afford. Your affordability is based on a number of factors:

• The size of your down payment (and expected closing costs)
• Your household income
• Your monthly expenses
• The expenses associated with owning a home

Down Payments

The amount you’ve accumulated for your down payment directly affects the maximum home price you can afford.

Minimum down payment of 5%

• Primary home under $500,000
• Secondary home (cottage or work condo downtown, for example) under $500,000
• You or immediate family must move into secondary home, like a child away at school

Example: $400,000 home

$400,000 home x 5% down payment = $20,000

Minimum down payment of 10%

For primary and secondary homes between $500,000 and $1 million, the amount above $500,000 requires a 10% down payment

Example: $700,000 home

First $500,000 x 5% down payment = $25,000

Remaining $200,000 x 10% down payment = $20,000

Total down payment: $25,000 + $20,000 = $45,000

Minimum down payment of 20%

Homes over $1 million as well as homes that are not owner-occupied, meaning you’re renting it out (including on AirBnB).

Example: $1,500,000

$1,500,000 home x 20% down payment = $300,000

What Are Your Debt Service Ratios?

These ratios are set by the Canada Mortgage and Housing Corporation (CMHC) and are used to aid lenders when calculating the maximum mortgage you can afford. Essentially, these ratios—your gross debt service ratio and your total debt service ratio—are expenses divided by annual income. If these are above 32% and 40% respectively, you won’t be approved for your mortgage.

Gross Debt Service Ratio (GDS)

(Mortgage payments + property taxes + heating costs + 50% of condo fees) ÷ annual income must be < 32%

Total Debt Service Ratio (TDS)

(Housing expenses (per GDS) + credit card interest + car payments + loan expenses) ÷ annual income must be < 40%

What you can do to increase your maximum mortgage affordability

If you’re unhappy with the size of mortgage you can afford, you have several options:

• Increase your down payment: This will allow you to purchase a more expensive home, as you need at least 5% of the total price as a down payment for homes under $500,000. For example, if you increase your down payment from $15,000 to $20,000, you can afford a $400,000 home rather than a $300,000 home. Keep in mind your down payment is just one criteria. Your TDS and GDS would also have to fall below the maximums in order to qualify for the more expensive home.
• Pay down your debts: Your TDS is directly affected by your debt load. Paying off debts will lower your monthly costs and increase the size of mortgage you can qualify for.
• Increase your income: Both your GDS and TDS are limited by your annual income, so bumping that number up will help you access a larger mortgage.
• Get a co-signer: If you have a second income that will guarantee they will pay the mortgage payment if you do not, you’ll be more likely to be approved and at a higher amount.

Tip!

Even though you’re approved for a certain mortgage amount, you don’t have to borrow it all!

Many industry experts advise you to keep your mortgage payments and housing costs at a maximum of 30% of your total income. If this percentage is higher, it leaves you vulnerable to defaulting on your mortgage if interest rates increase or your job situation changes.

You should include a 10% buffer in your TDS for savings for debt payments, to save for the future, and to deal with any unforeseen problems.

Example Maximum Mortgage Affordability Calculation

Here’s a case study, to give you an idea of how to calculate your GDS and TDS.

• Annual income: $70,000
• Partner income: $55,000
• Annual property taxes: $4,600
• Monthly heating costs: $250
• Monthly car payment: $325
• Monthly credit card payment: $208
• Down payment: $70,000

Step 1: Calculate your maximum monthly mortgage payment, based on your GDS

($70,000 monthly income + $55,000 partner income) x 32% GDS ratio = $40,000 max spend

$40,000 max spend - $4,600 property taxes - $3,000 annual heating costs = $32,400 max yearly mortgage payment

$32,400 max mortgage payments ÷ 12 months = $2,700 max monthly mortgage payment

Step 2: Calculate your maximum monthly mortgage payment, based on your TDS

($70,000 monthly income + $55,000 partner income) x 40% TDS ratio = $50,000 max spend

$50,000 max spend - $4,600 property taxes - $3,000 annual heating costs - $3,900 annual car payments - $2,500 credit card payments = $36,000 max yearly mortgage payment

$36,000 max mortgage payments ÷ 12 months = $3,000 max monthly mortgage payment

Tip!

When calculating your maximum monthly mortgage payment using your GDS and TDS, the lower of the two is your maximum amount.

Therefore, based on your GDS and TDS, the largest monthly payment you and your partner can afford is $2,700, (since you go with the lowest of these two).

Based on all the above information, you could afford a mortgage of $650,000 at 2.42%, 5-year fixed. Your monthly mortgage payments would be just under $2,700.

Step 3: Calculate your total mortgage based on your available down payment amount

Lastly, make sure your down payment fits your above scenario. Your down payment of $70,000 would be about 11% of $650,000. Your minimum down payment for $650,000 is calculated like this:

5% of the first $500,000 = $25,000

10% of the remaining $150,000 = $15,000

Total minimum down payment: $25,000 + $15,000 = $40,000

Therefore you meet the requirement of minimum $40,000 down on a $650,000 home!

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