1. Buying
2. How Much Can I afford?

Maximum Affordability

When shopping for a home it’s important to determine the maximum mortgage and home price you can qualify for. To determine your maximum affordability, lenders take several factors into account, including:

• Your down payment
• Your debt service ratios - which are determined based on your income , the monthly costs associated with owning the home and your monthly debt commitments

How Your Down Payment Determines Affordability

Because your down payment must be at least 5% of your purchase price, this can limit your affordability. If your down payment amount is fixed at say $15,000, the maximum home you will be able to afford, regardless of your debt service ratios, is ($15,000 / 5%) or $300,000. The minimum down payment is higher if the purchase price is over $500,000 (5% of the first $500,000 and 10% of any amount over $500,000). It should also be noted that home prices $1,000,000 or more require a 20% down payment.

How Your Debt Service Ratios Determine Affordability

Set by the Canada Mortgage and Housing Corporation (CMHC), your debt service ratios – including your gross debt service ratio and your total debt service ratio – are used to calculate the maximum mortgage the lender can offer. This maximum mortgage is then combined with your available down payment to determine the maximum home price you can purchase.

Your lenders uses these ratios to ensure you can consistently make your monthly payment as they place a limit on the amount of your income that can go towards your housing expenses and monthly debt obligations. The industry standard guideline for GDS is no more than 32% and the guideline for TDS is no more than 40%, however you may be allowed to exceed these limits if you have a stable source of income and good credit. If the mortgage you want to take on, forces your GDS or TDS above 39% and 44% respectively, you will not be approved for that amount.

Even if you have $15,000 for a down payment, your GDS and TDS score may only approve you for a $250,000 mortgage. Thus when combined with your $15,000 down payment, your max affordability would be $265,000.

How to Increase Your Maximum Mortgage Affordability

If you’ve used our mortgage affordability calculator, and you’re unhappy with your results, there are several steps you can take to increase your maximum affordability:

• Increase your down payment – This will give you the ability to increase your affordability and purchase a more expensive home.
• Pay off your debts – This will lower your TDS ratio and free up more of your income for your mortgage payment, ultimately giving you the ability to carry a larger mortgage and therefore more expensive home.
• Increase your income – This is the tougher option, but it will allow you to afford a larger monthly mortgage payment, which will increase the overall size of the mortgage you can afford to borrow and repay. Alternatively, you can apply for your mortgage with your partner, or get a co-signer, such as your parents, to guarantee your mortgage.

A Note About Borrowing At Your Maximum Affordability

Your GDS and TDS ratios are just guidelines, and you do not have to borrow the maximum amount possible. According to the 2013 RBC Affordability Index Survey¹, homeowners have been using more and more of their income to service their mortgage payments, leaving them vulnerable to job loss and interest rate increases.

Some industry experts have even suggested that the traditional TDS formulas be amended to include a 10% savings buffer. This concept has gained traction and even earned the nickname the Total Debt Service + Savings (TDSS) ratio². When deciding what your maximum purchase price is going to be, it’s important to make sure that you have enough room left over in your budget to pay down debt, save for the future, and weather interest rate increases and job loss.

A Sample Maximum Affordability Calculation

Let's look at an example where your gross annual income is $75,000. You're buying a home with annual property taxes of $3,600, monthly heating costs are $200 and since you're buying a house, there are no condo fees. In addition to your housing expenses, you have a monthly car loan at $300 and must make minimum monthly payments of $250 on your credit card debt. You have $20,000 saved up for a down payment.

Since both your GDS and TDS ratios must be less than or equal to the maximum, the largest mortgage payment you can afford is $1,450. Though your GDS suggests you can afford $1,500, at that monthly payment, your TDS will be over 40% and therefore $1,450 is the maximum payment that ensures both debt service ratios fall within the allowable range.

With a monthly mortgage payment of $1,450 per month, you can afford a $300,000 mortgage with a 5-year fixed interest rate of 3.28% and an amortization period of 25 years. Finally you must ensure you have the minimum down payment of 5%. Since $20,000 / $300,000 = 6.67% you can satisy the minimum down payment requirement.

After calculating your GDS ratio, TDS ratio and down payment percent, you can determine your maximum affordability at $300,000. Since your TDS ratio is limiting your affordability, you could try paying off some of your credit card or car debt to increase your maximum affordability.

References and Notes

1. Effects of CMHC Increase, RBC Housing Affordability Report, 2013-11-27
2. Pay your mortgage and save too? Here's a formula to build your wealth, The Globe and Mail, 2013-01-30