How Much Can I Afford?

How much you can afford to spend on a home is determined by how much you can borrow from a mortgage lender. So the first thing you need to do when searching for a new home is to figure out how much mortgage you can afford.

Mortgage affordability is based on your household income, debt, personal monthly expenses, and the expenses associated with owning a home. To determine your maximum affordability, lenders take two primary factors into account: your down payment and your debt service ratios.

There are minimum down payment rules in place in Canada. The amount of money you have for a down payment can limit your maximum mortgage affordability. The minimum down payment rules in Canada are:

• 5% of the purchase price up to $500,000, plus
• 10% of any part of the price between $500,000 and $1,000,000, or
• 20% of the total purchase price over $1,000,0000

You can determine how much you can afford to spend using this formula:

• Down Payment / 5% = Maximum Affordability

For example, if your down payment is $25,000 or less, then your maximum purchase price is $25,000 divided by 5%, or $500,000.

Your debt service ratios, which includes your gross debt service ratio (GDS) and your total debt service ratio (TDS), is set by the Canada Mortgage and Housing Corporation (CMHC). Mortgage 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 deb obligations.

Gross Debt Service Ratio (GDS)

The first mortgage affordability guideline, GDS, is your monthly housing costs. This includes mortgage payments, property taxes, heating costs. For condominiums, it also includes 50% of your monthly condominium fees. Your monthly housing costs should not be more than 32% of your gross household income.

Total Debt Service Ratios (TDS)

The second mortgage affordability guideline, TDS, is your total monthly debt load. This includes credit card interest, car payments, other loan expenses, and housing costs. Your total monthly debt load should not be more than 40% of your gross monthly income.