How much can I afford to pay for a home?
There are a number of factors (such as your income, credit score, your down payment, your debt, etc.) that can change what you can spend and how large of a mortgage you can afford to take on.
Mortgage affordability and your down payment
There is a minimum down payment rules in place. The amount of money you have saved for a down payment can limit your maximum mortgage affordability. The minimum down payments in Canada are:
- 5% of the purchase price up to $500,000, plus
- 10% of any part of the price between $500,000 and $1 million, or
- 20% of the total purchase price for homes valued at over $1 million.
In addition to the down payment, you must also be able to show that you have the capacity to cover other closing costs such as the legal fees and disbursements, appraisal fees, and a survey certificate.
As a rule, at least 5% of the down payment must be from your own cash resources or a gift from a family member. Some lenders will accept gift money from a family member as a down payment however, this requires a signed letter from the donor stating that it is a gift and not a loan.
For any down payment that is less than 20% of the total value of the home, mortgage loan insurance from either the Canada Mortgage Housing Corporation (CMHC), Sagen (Genworth Canada), or Canada Guaranty is required.
Debt Service Ratios and mortgage affordability
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.
Gross Debt Service Ratio is calculated as follows:
Mortgage payments + Property taxes + Heating Costs + 50% of condo fees divided by Annual Income
The ratio should be < 32%
Total Debt Service Ratio is calculated as follows:
Housing expenses (per GDS) + Credit Card payments + Loan payments + Line of Credit payments divided by Annual Income
The ratio should be < 40%
Lenders use these ratios to ensure that 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 through traditional lending guidelines.
How to Increase Your Maximum Mortgage Affordability
If you have used our mortgage affordability calculator, and you are unhappy with your results, there are several steps you can take to increase your mortgage 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.
Maximum affordability vs. what you should actually spend
Your GDS and TDS ratios are just guidelines, and you do not have to borrow the maximum amount possible.
When deciding what your maximum purchase price is going to be, it’s important to make sure that you have enough room leftover in your budget to pay down debt, save for the future, manage interest rate increases and job loss.