How Much Mortgage Can You Afford? A Canadian Guide

Gross Debt Service (GDS) Ratio

• What it measures: Whether your housing-related debt is sustainable relative to your income.
• Why it matters: Lenders use GDS along with TDS to set the maximum mortgage amount you qualify for.

Sources: TD Canada Trust, Wowa Media Inc.

Total Debt Service (TDS) Ratio

• Included debts: Housing costs (from GDS) plus credit card minimums, car loan payments, student loan payments, personal loan payments, and any other recurring debt obligations.
• Comparison: While GDS focuses only on housing, TDS provides a fuller picture of your financial commitments.
• Practical effect: Even if your housing costs are within GDS limits, high other debt can push your TDS above the limit and reduce the mortgage amount you qualify for.

Sources: TD Canada Trust, Wowa Media Inc.

Down Payment Minimums and CMHC Insurance

In Canada, the minimum down payment is based on the purchase price of the home. According to the Government of Canada, you need at least 5% for the first $500,000 of the purchase price, 10% for the portion between $500,000 and $1.5 million, and 20% for the portion above $1.5 million.

• If your down payment is less than 20%, mortgage loan insurance is typically required.
• Mortgage loan insurance premiums range from 0.6% to 4.5% of the mortgage amount, depending on the size of your down payment.
• The premium can be added to your mortgage amount, and you pay interest on it at the same rate as your mortgage.

Sources: Government of Canada, Financial Consumer Agency of Canada, Ratehub.ca, Wowa Media Inc.

Mortgage Stress Test: Qualifying Rate

• How it works: Your income and debts are evaluated using the qualifying rate, not the actual contract rate, to determine the maximum mortgage amount.
• Impact: The qualifying rate reduces the amount you can borrow compared to a simple payment calculation based on your contract rate.

Sources: Wowa Media Inc.

Estimating Your Budget

To estimate how much mortgage you can afford, start by calculating your gross monthly income and your monthly debt payments. Then, apply the GDS and TDS limits to find the maximum housing payment you can support. A rough rule of thumb is that you may be able to borrow about four times your annual gross income, but this is only a starting point. Actual calculations must include all debts and other housing costs.

• Step 1: Calculate gross monthly income (pre-tax).
• Step 2: List all monthly debt payments (car loans, student loans, credit cards, etc.).
• Step 4: Apply the TDS limit to ensure total debt payments, including the new mortgage payment, stay within the limit.

Sources: Wowa Media Inc.

Preapproval Process Explained

A mortgage preapproval is a lender's preliminary assessment of how much you can borrow, based on your income, debts, and credit history. It provides a written commitment for a specific mortgage amount and interest rate, typically valid for 90 to 120 days. During preapproval, the lender evaluates your financial situation and performs a credit check, but it does not guarantee final approval, as the property itself must also meet the lender's criteria.

• Why get preapproved: It gives you a clear price range and can make you a more competitive buyer.
• What you'll need: Proof of income (pay stubs, tax returns), proof of assets, and details of your current debts.
• Impact on affordability: Preapproval uses the stress test to calculate the amount you qualify for, so it will reflect the higher qualifying rate.

Sources: TD Canada Trust, Wowa Media Inc.