Find out how much mortgage you can afford
You also need to determine if you have enough cash resources to purchase a home. The cash required is derived from the down payment put towards the purchase price, as well as the closing costs that must be incurred to complete the purchase. Ratehub.ca can help you estimate these closing costs with first tab under our affordability calculator, which will help you determine how much house you can afford.
Frequently Asked Questions!
What is mortgage affordability?
Mortgage affordability refers to how much you’re able to borrow, based on your current income, debt and living expenses. It’s essentially your purchasing power when buying a home. The higher your mortgage affordability, the more expensive a home you can afford to purchase.
The term ‘affordability’ is also used to describe overall housing affordability, which has more to do with the cost of living in a particular city. If the cost of housing relative to average income in a city is high, it will be seen as a less affordable place to live. The two terms are related, but it’s important to understand the difference.
How much can I afford?
How much you can afford to spend on a home in Canada is most determined by how much you can borrow from a mortgage provider. That is, unless you have enough cash to purchase a property outright, which is unlikely. Use the above mortgage affordability calculator above to figure out how much you can afford to borrow, based on your current situation.
How do I use the mortgage affordability calculator?
To use our mortgage affordability calculator, simply enter you and your partner’s income (or your co-applicant’s income), as well as your living costs and debt payments. The calculator can estimate your living expenses if you don’t know them.
With these numbers, you’ll be able to calculate how much you can afford to borrow. You can change your amortization period and mortgage rate, to see how that would affect your mortgage affordability and your monthly payments.
How do lenders estimate affordability?
Lenders look at two ratios when determining the mortgage amount you qualify for, which generally indicate how much you can afford. These ratios are called the Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio. They take into account your income, monthly housing costs and overall debt load.
The first affordability rule, as set out by the Canada Mortgage and Housing Corporation (CMHC), is that your monthly housing costs – mortgage principal and interest, taxes and heating expenses (P.I.T.H.) – should not exceed 32% of your gross household monthly income. For condominiums, P.I.T.H. also includes half of your monthly condominium fees. The sum of these housing costs as a percentage of your gross monthly income is your GDS ratio.
The CMHC’s second affordability rule is that your total monthly debt load, including housing costs, should not be more than 40% of your gross monthly income. In addition to housing costs, your total monthly debt load would include credit card interest, car payments, and other loan expenses. The sum of your total monthly debt load as a percentage of your gross household income is your TDS ratio.
Note that while the industry guideline for GDS and TDS is 32% and 40% respectively, most borrowers with good credit and steady income will be allowed to exceed these limits. The maximum allowed is 39% and 44%. The calculator uses these maximums to estimate affordability.
What is Canada Mortgage Housing Corporation (CMHC) Insurance and Debt Ratios?
As of July 1st, 2020, the maximum debt service ratios for CMHC-insured mortgages will change, as a result of the 2020 economic downturn. CMHC would previous not issue mortgage default insurance if borrowers had a Gross Debt Service Ratio of more than 44%, or Total Debt Service Ratio of more than 39%. From July 1st, borrowers will need to have a GDS of less than 45% and a TDS of less than 35% for their mortgage to be eligible for CMHC mortgage default insurance coverage. Learn more about these changes here.
What is a down payment?
Your down payment is a benchmark used to determine your maximum affordability. Ignoring income and debt levels, you can determine how much you can afford to spend using a simple calculation:
If your down payment is $25,000 or less, you can find your maximum purchase price using this formula: down payment / 5% = maximum affordability.
If your down payment is $25,001 or more, you can find your maximum purchase price using this formula: down payment amount – $25,000 / 10% + $500,000. For example, if you have saved $50,000 for your down payment, the maximum home price you could afford would be $50,000 – $25,000 = $25,000 / 10% = $250,000 + $500,000 = $750,000.
Any mortgage with less than a 20% down payment is known as a high-ratio mortgage, and requires you to purchase mortgage default insurance, commonly referred to as CMHC insurance.
How much cash is required to buy a house?
In addition to your down payment and CMHC insurance, you should set aside 1.5% – 4% of your home’s selling price to cover closing costs, which are payable on closing day. Many home buyers forget to account for closing costs in their cash requirement.
Are there other mortgage qualification factors?
In addition to your debt service ratios, down payment, and cash for closing costs, mortgage lenders will also consider your credit history and your income when qualifying you for a mortgage. All of these factors are equally important. For example even if you have good credit, a sizeable down payment, and no debts, but an unstable income, you might have difficulty getting approved for a mortgage.
Keep in mind that the mortgage affordability calculator can only provide an estimate of how much you’ll be approved for, and assumes you’re an ideal candidate for a mortgage. To get the most accurate picture of what you qualify for, speak to a mortgage broker about getting a mortgage pre-approval.
How do I increase my mortgage affordability?
If you want to increase how much you can borrow, thus increasing how much you can afford to spend on a home, there are few steps you can take.
1. Save a larger down payment: The larger your down payment, the less interest you’ll be charged over the life of your loan. A larger down payment also saves you money on the cost of CMHC insurance.
2. Get a better mortgage rate: Shop around for the best mortgage rate you can find, and consider using a mortgage broker to negotiate on your behalf. A lower mortgage rate will result in lower monthly payments, increasing how much you can afford. It will also save you thousands of dollars over the life of your mortgage.
3. Increase your amortization period: The longer you take to pay off your loan, the lower your monthly payments will be, making your mortgage more affordable. However, this will result in you paying more interest over time.
These are just a few ways you can increase the amount you can afford to spend on a home, by increasing your mortgage affordability. However, the best advice will be personal to you. Find a licensed mortgage broker near you to have a free, no obligation conversation that’s tailored to your needs.
* Rates may vary. If you are looking for a local mortgage specialist, contact our team.
* Using this or any online Mortgage Calculators does not constitute a pre-approval. This is a tool to use before you make an appointment with a Mortgage Specialist.*
*Information above and all calculators are brought to you by ratehub.ca*
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