Before you start to look for your dream home, you should find out how much you can responsibly afford. Your affordability is based on a number of factors:
The amount you’ve accumulated for your down payment directly affects the maximum home price you can afford.
Example: $400,000 home
$400,000 home x 5% down payment = $20,000
For primary and secondary homes between $500,000 and $1 million, the amount above $500,000 requires a 10% down payment
Example: $700,000 home
First $500,000 x 5% down payment = $25,000
Remaining $200,000 x 10% down payment = $20,000
Total down payment: $25,000 + $20,000 = $45,000
Homes over $1 million as well as homes that are not owner-occupied, meaning you’re renting it out (including on AirBnB).
$1,500,000 home x 20% down payment = $300,000
These ratios are set by the Canada Mortgage and Housing Corporation (CMHC) and are used to aid lenders when calculating the maximum mortgage you can afford. Essentially, these ratios—your gross debt service ratio and your total debt service ratio—are expenses divided by annual income. If these are above 32% and 40% respectively, you won’t be approved for your mortgage.
(Mortgage payments + property taxes + heating costs + 50% of condo fees) ÷ annual income must be < 32%
(Housing expenses (per GDS) + credit card interest + car payments + loan expenses) ÷ annual income must be < 40%
If you’re unhappy with the size of mortgage you can afford, you have several options:
Even though you’re approved for a certain mortgage amount, you don’t have to borrow it all!
Many industry experts advise you to keep your mortgage payments and housing costs at a maximum of 30% of your total income. If this percentage is higher, it leaves you vulnerable to defaulting on your mortgage if interest rates increase or your job situation changes.
You should include a 10% buffer in your TDS for savings for debt payments, to save for the future, and to deal with any unforeseen problems.
Here’s a case study, to give you an idea of how to calculate your GDS and TDS.
Step 1: Calculate your maximum monthly mortgage payment, based on your GDS
($70,000 monthly income + $55,000 partner income) x 32% GDS ratio = $40,000 max spend
$40,000 max spend - $4,600 property taxes - $3,000 annual heating costs = $32,400 max yearly mortgage payment
$32,400 max mortgage payments ÷ 12 months = $2,700 max monthly mortgage payment
Step 2: Calculate your maximum monthly mortgage payment, based on your TDS
($70,000 monthly income + $55,000 partner income) x 40% TDS ratio = $50,000 max spend
$50,000 max spend - $4,600 property taxes - $3,000 annual heating costs - $3,900 annual car payments - $2,500 credit card payments = $36,000 max yearly mortgage payment
$36,000 max mortgage payments ÷ 12 months = $3,000 max monthly mortgage payment
When calculating your maximum monthly mortgage payment using your GDS and TDS, the lower of the two is your maximum amount.
Therefore, based on your GDS and TDS, the largest monthly payment you and your partner can afford is $2,700, (since you go with the lowest of these two).
Based on all the above information, you could afford a mortgage of $650,000 at 2.42%, 5-year fixed. Your monthly mortgage payments would be just under $2,700.
Step 3: Calculate your total mortgage based on your available down payment amount
Lastly, make sure your down payment fits your above scenario. Your down payment of $70,000 would be about 11% of $650,000. Your minimum down payment for $650,000 is calculated like this:
5% of the first $500,000 = $25,000
10% of the remaining $150,000 = $15,000
Total minimum down payment: $25,000 + $15,000 = $40,000
Therefore you meet the requirement of minimum $40,000 down on a $650,000 home!