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Content last updated: October 19, 2020
When searching for a new home, the first step is to figure out how much mortgage you can afford. Affordability is based on the household income of the applicants purchasing the house, the personal monthly expenses of those applicants (car payments, credit expenses, etc.), and the expenses associated with owning a home (property taxes, condo fees, and heating costs). The calculator below will show you the maximum purchase price that you can qualify for.
You also need to determine if you have enough cash resources to purchase a home. The cash required is derived from the down payment put towards the purchase price, as well as the closing costs that must be incurred to complete the purchase. Ratehub.ca can help you estimate these closing costs with the first tab under our affordability calculator, which will help you determine how much house you can afford. Advertising Disclosure
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Mortgage affordability refers to how much you’re able to borrow, based on your current income, debt, and living expenses. It’s essentially your purchasing power when buying a home. The higher your mortgage affordability, the more expensive a home you can afford to purchase.
The term ‘affordability’ is also used to describe overall housing affordability, which has more to do with the cost of living in a particular city. If the cost of housing relative to the average income in a city is high, it will be seen as a less affordable place to live. The two terms are related, but it’s important to understand the difference.
How much you can afford to spend on a home in Canada is most determined by how much you can borrow from a mortgage provider. That is unless you have enough cash to purchase a property outright, which is unlikely. Use the above mortgage affordability calculator above to figure out how much you can afford to borrow, based on your current situation.
To use our mortgage affordability calculator, simply enter you and your partner’s income (or your co-applicant’s income), as well as your living costs and debt payments. The calculator can estimate your living expenses if you don’t know them.
With these numbers, you’ll be able to calculate how much you can afford to borrow. You can change your amortization period and mortgage rate, to see how that would affect your mortgage affordability and your monthly payments.
There is a rule of thumb about how much you can afford, based on the calculations your mortgage provider will make. The rule of thumb is you can afford a mortgage where your monthly housing costs are no more than 32% of your gross household income, and where your total debt load (including housing costs) is no more than 40% of your gross houshold income. This rule is based on your debt service ratios.
Lenders look at two ratios when determining the mortgage amount you qualify for, which generally indicate how much you can afford. These ratios are called the Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio. They take into account your income, monthly housing costs, and overall debt load.
The first affordability guideline, as set out by the Canada Mortgage and Housing Corporation (CMHC), is that your monthly housing costs – mortgage principal and interest, taxes, and heating expenses (P.I.T.H.) - should not exceed 32% of your gross household monthly income. For condominiums, P.I.T.H. also includes half of your monthly condominium fees. The sum of these housing costs as a percentage of your gross monthly income is your GDS ratio.
The CMHC’s second affordability guideline is that your total monthly debt load, including housing costs, should not be more than 40% of your gross monthly income. In addition to housing costs, your total monthly debt load would include credit card interest, car payments, and other loan expenses. The sum of your total monthly debt load as a percentage of your gross household income is your TDS ratio
While the general guidelines for GDS and TDS are 32% and 40% respectively, most borrowers with good credit and steady income are allowed to exceed these guidelines.
The maximum GDS limit used by most lenders to qualify borrowers is 39% and the maximum TDS limit is 44%. Our mortgage calculator uses these maximum limits to estimate affordability.
As of July 1st, 2020, the CMHC implemented new GDS and TDS limits for mortgages that it insures. The new GDS limit for CMHC-insured mortgages is 35% and the new TDS limit for CMHC-insured mortgages is 42%.
The CMHC changes will have minimal impact on borrowers as GenWorth Financial and Canada Guaranty, the two other mortgage insurance providers in Canada, did not change their maximum limits. Consequently, mortgage lenders will continue to use the old maximum GDS/TDS limits of 39/44 available through these insurers.
Your down payment is a benchmark used to determine your maximum affordability. Ignoring income and debt levels, you can determine how much you can afford to spend using a simple calculation.
If your down payment is $25,000 or less you can find your maximum purchase price using this formula:
Down Payment / 5% = Maximum Affordability
If your down payment is $25,001 or more you can find your maximum purchase price using this formula:
(Down Payment Amount - $25,000) / 10% + $500,000 = Maximum Affordability
For example, let's say you have saved $50,000 for your down payment. The maximum home price you could afford would be:
($50,000 - $25,000) / 10% + $500,000 = $750,000
Any mortgage with less than a 20% down payment is known as a high-ratio mortgage, and requires you to purchase mortgage default insurance, commonly referred to as CMHC insurance.
In addition to your down payment and CMHC insurance, you should set aside 1.5% - 4% of your home's selling price to cover closing costs, which are payable on closing day. Many home buyers forget to account for closing costs in their cash requirements.
In addition to your debt service ratios, down payment, and cash for closing costs, mortgage lenders will also consider your credit history and your income when qualifying you for a mortgage. All of these factors are equally important. For example, even if you have good credit, a sizeable down payment, and no debts, but an unstable income, you might have difficulty getting approved for a mortgage.
Keep in mind that the mortgage affordability calculator can only provide an estimate of how much you'll be approved for, and assumes you’re an ideal candidate for a mortgage. To get the most accurate picture of what you qualify for, speak to a mortgage broker about getting a mortgage pre-approval.
If you want to increase how much you can borrow, thus increasing how much you can afford to spend on a home, there are few steps you can take.
1. Save a larger down payment: The larger your down payment, the less interest you’ll be charged over the life of your loan. A larger down payment also saves you money on the cost of CMHC insurance.
2. Get a better mortgage rate: Shop around for the best mortgage rate you can find, and consider using a mortgage broker to negotiate on your behalf. A lower mortgage rate will result in lower monthly payments, increasing how much you can afford. It will also save you thousands of dollars over the life of your mortgage.
3. Increase your amortization period: The longer you take to pay off your loan, the lower your monthly payments will be, making your mortgage more affordable. However, this will result in you paying more interest over time.
These are just a few ways you can increase the amount you can afford to spend on a home, by increasing your mortgage affordability. However, the best advice will be personal to you. Find a licensed mortgage broker near you to have a free, no-obligation conversation that’s tailored to your needs.