MoneySense Toolkit: The mortgage affordability calculator


Mortgage Affordability Calculator logo

One of the first questions new home buyers should ask themselves is, “How much can I afford?” Affordability is an essential part of setting up your home-buying budget, and there are a variety of factors that affect it. If you’re looking to buy a home, you’ll want to know your mortgage affordability, and for that, you should start by consulting an online calculator.

What is mortgage affordability?

Mortgage affordability refers to the maximum mortgage you can afford to borrow, based on your gross income, down payment, debt payments and living costs. In short, the higher your mortgage affordability, the higher your maximum purchase price. 

Many factors are used to determine mortgage affordability, including your gross household income, the monthly expenses of owning the property (property taxes, heating costs and condo fees), and your other debt obligations, such as your credit card payments and car loans. When completing a mortgage application, a lender may also take your credit history into account. 

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Why should you use a mortgage affordability calculator? 

Using a mortgage affordability calculator is an important first step towards determining how much you can spend on a home. These calculators take your gross income, debts and other living expenses to calculate your maximum home purchase price. 

Many mortgage affordability calculators also let you specify your desired down payment and purchase location. You can then play with these inputs to see the impact they have on your maximum affordability. For example, by paying down debt or increasing your down payment, you’ll likely be able to spend more on the home. It can also help you decide whether you can afford to purchase in your ideal neighbourhood.

It’s recommended that you confirm your mortgage affordability with a mortgage broker or lender, who will take the nuances of your financial situation into account. That said, if you aren’t ready for that step, our mortgage affordability calculator can help you get started.

How does it work?

To use the mortgage affordability calculator, you’ll need to gather the following information:

  • Your Income
  • Your co-applicant’s income (if applicable)
  • Your monthly debt payments, including credit cards, car payments and other loan expenses
  • Your monthly living costs, including property tax, condo fees and heating costs
  • Your down payment amount

These factors are used by lenders to calculate two ratios that serve as guidelines in determining how much you can afford. They are called the gross debt service (GDS) ratio and the total debt service (TDS) ratio. 

Gross debt service ratio

Your GDS ratio is based on your monthly housing costs (mortgage principal and interest, property taxes and heating expenses), divided by your gross household income. For example, let’s say you have a gross household income of $100,000 per year. If your new home costs you $3,000 per month, you would have a GDS ratio of 36%. 

Your GDS ratio cannot exceed 39%, according to the Canada Housing and Mortgage Corporation (CMHC).

Total debt service ratio

The other ratio used to calculate affordability is your TDS ratio. This ratio takes the above housing expenses and adds your credit card interest, car payments and other loan expenses, then divides it by your gross household income. For example, if your household brings in $100,000 per year, your housing costs amount to $3,000 per month and you spend $500 per month on other debts, you would have a TDS ratio of 42%. 

For the home to be affordable according to CMHC, your TDS ratio cannot exceed 44%.

How to increase your mortgage affordability

If you have found that your maximum affordability is lower than you expected, here are some reasons that might be—and what you can do about it.

  • GDS ratio: If your GDS ratio is limiting your mortgage affordability, you’ll need to increase your gross household income.
  • TDS ratio: If it’s your TDS ratio, the likely culprit is existing debt. Focus on paying off your credit card balances or car loans to increase your mortgage affordability.
  • Down payment: You’ll need to save at least 5% of your home’s purchase price or more, depending on the desired purchase price. If this is a limiting factor, consider options to increase your down payment, such as putting more money aside each month, accessing up to $35,000 in RRSP funds through the Home Buyers’ Plan (if you’re a first-time home buyer) or asking a family member for a monetary gift.
  • Get a co-signer: Having a family member co-sign your mortgage will add their income to your application, increasing how much mortgage you can afford. Keep in mind that if you default on your payments, your co-signer will be responsible for the debt.

How to lower your mortgage payments

To ensure mortgage payments fit comfortably within your budget, you can also work to lower your monthly payments on the same mortgage amount: 

  • Increase your amortization period: Stretching out your mortgage over a longer period (for example, opting for a 25-year instead of a 20-year mortgage) will decrease your monthly costs. However, you will pay more in interest in the long run. 
  • Find a lower mortgage rate: To bring down your monthly payments, visit multiple lenders and find the one willing to offer you the most competitive interest rate. You may also want to consider using a mortgage broker with access to multiple lenders and who can help find you the best rate.  
You’re 2 minutes away from getting the best mortgage rates in CanadaAnswer a few quick questions to get a personalized rate quote

I’m buying a homeI’m renewing/refinancing

You will be leaving MoneySense. Just close the tab to return.

Other MoneySense mortgage calculators

  • Mortgage payment calculator
  • Mortgage down payment calculator
  • Mortgage penalty calculator
  • Land transfer tax calculator
  • Mortgage refinance calculator
  • CMHC mortgage insurance calculator
  • Mortgage renewal calculator

The post MoneySense Toolkit: The mortgage affordability calculator appeared first on MoneySense.


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