How Much Mortgage Can I Afford in Canada?

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If you’re looking to buy a home, the odds are you’ve asked yourself how much mortgage can I afford in Canada? This is an important question to ask since the amount of mortgage you’re approved for will determine what kind of home you can buy.

That said, the amount of mortgage you’re approved for doesn’t tell you the whole story. Mortgage lenders use their own calculations to determine affordability. This formula mainly focuses on the carrying costs of your home and doesn’t factor in additional expenses such as hobbies, saving for retirement, or even the cost of raising kids.

While there’s nothing stopping you from using the maximum mortgage you’re approved for, it’s likely a good idea to be smart about your borrowing so you don’t become house-poor.

How much mortgage can I afford in Canada?

Every person that applies for a mortgage will be approved for a different amount. That’s because how much you’ll qualify for depends on things such as your income, debt levels, down payment, and credit score. There’s no need to ask yourself how much mortgage can I afford in Canada since the following three ways will give you a clear picture.

The 4.5X your income rule

The 4.5X your income rule is nothing official, but it’s one quick method that experts recommend to gauge mortgage affordability. Basically, if your mortgage is no larger than 4.5X your gross (pre-tax) income, the home is affordable.

For example, if you earn $50,000 a year, your mortgage shouldn’t exceed $225,000. Alternatively, if you and your partner have a combined income of $200,000, it would be wise to not get a mortgage that is more than $900,000.

Again, this “rule” is just a recommendation. There’s a good chance that the formal calculations used by lenders will approve you for more. But again, this rule focuses more on real-life affordability as opposed to you dedicating more of your income towards housing.

Gross debt service ratio

Your gross debt service (GDS) ratio is the most basic calculation mortgage lenders use to determine affordability. To calculate your GDS ratio, you would add up all of your housing expenses and compare it to your pre-tax income on a monthly basis. Housing expenses would include:

  • Your mortgage payments
  • Property taxes
  • Maintenance fees
  • Utilities

Your GDS ratio should be no more than 32% of your gross monthly income. For example, let’s say you make $75,000 a year. That means your monthly income is $6,250. Your mortgage affordability would be based on your GDS ratio of $2,000.

Total debt service ratio 

Your total debt service (TDS) ratio is the other formula that lenders use to see how much mortgage you can afford. They would take your GDS and add any other monthly debt obligations you have such as:

  • Student loans
  • Car payments
  • Credit card debt

Your TDS ratio should not exceed 40% of your gross monthly income. Using the same example as above, the mortgage affordability on a monthly basis would be $2,500.

It should be noted that some lenders use a different percentage when calculating your GDS and TDS ratios. That means you might be able to afford more or less depending on who you get your mortgage from. In addition, if you need mortgage insurance, and you plan to get it from CMHC, your GDS and TDS must not exceed 39% and 44% respectively. 

How your down payment affects your housing affordability

Whenever you buy a home in Canada, there’s a minimum down payment of 5%. However, depending on the purchase price of your home, you’ll need a higher down payment. The higher your down payment, the more you can afford.

The minimum down payment in Canada is as follows:

  • 5% for homes with a purchase price of less than $500,000
  • 5% of the purchase price for the first $500,000 and 10% for the rest for homes with a purchase price of less than $999,999
  • 20% for homes with a purchase price of $1,000,000 or more

When you have a down payment of less than $1,000,000, you have a high ratio mortgage. When that happens, you’re required to get mortgage insurance. This insurance gets added directly to your mortgage payments, so it would increase your GDS and TDS ratios. When people ask how much mortgage can I afford in Canada, they often forget to factor in mortgage insurance. 

The mortgage stress test can also reduce affordability

If you’re trying to figure out how much mortgage you can afford, you need to consider the mortgage stress test. Despite the fact that mortgage lenders have their own criteria to determine affordability, the government of Canada requires you to pass a stress test for you to be approved.

The stress test itself is straightforward, but it can have a huge impact on how much home you can afford. Under the stress test, your mortgage interest rate calculation needs to fall under the higher of following conditions:

  • The interest rate you’re extended plus 2%
  • A 5.25% interest rate

For example, let’s say you’re approved for a mortgage rate of 3% over 5 years. Under the mortgage stress test, the rate used to determine your GDS and TDS would be 5.25%. If the mortgage rate extended to you is 3.5%, you’d have to qualify at 5.50%.

Many potential homeowners and even current homeowners think this stress test is unfair, but it was introduced to help Canadians lower their debt levels. The idea is that when interest rates eventually rise, you would already have a buffer to accommodate the increase.

Get pre-approved for a mortgage

If you’re still asking how much mortgage can I afford, there’s a simple answer. Just get pre-approved for a mortgage. Mortgage lenders and mortgage brokers can look at all of your information and quickly determine how much you can afford. They’ll also factor things in such as the mortgage stress test.

Getting pre-approved doesn’t take long and it’s basically a promise from your lender. You’ll know exactly how much you’ll be approved for and what mortgage rate you’ll get. This pre-approval is also typically held for 90 – 120 days, so you can find a home with confidence. 

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Additional costs to consider for mortgage affordability

Knowing how much mortgage you can afford is never a bad idea, but as mentioned, the calculations focus on your housing costs. There will always be additional expenses that come up when it comes to buying a home as well as your personal life. You should always make sure you include a buffer for the following things:

  • Closing costs – On average, closing costs will run you about 2% to 4% of your purchase price. Closing costs include things such as lawyer fees, and land transfer tax.
  • Moving costs – Many people hire movers, and they’re not exactly cheap. Even if you decide to move everything yourself, you may still need to pay for a truck and moving supplies.
  • Furniture – Most people will need to buy new or additional furniture when moving. While there are ways to save, you still need to budget for it.
  • Savings – If you max out your mortgage, you may not have any additional funds leftover to put into your Registered Retirement Savings Plan or Tax-Free Savings Account. Even something such as taking a vacation may become unaffordable.
  • Having kids – Many people buy a home before having kids. Once the little ones come along, your expenses can increase quite a bit. If most of your money is going towards housing costs, you may find budgeting difficult with kids.

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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