Mortgage Affordability Calculator
Dec 22, 2024Quickly find out how much house you can afford — and then learn how amortization, the stress test and your debts affect mortgage affordability.Mortgage Affordability Calculator
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Mortgage affordability factors
Income
Mortgage affordability depends heavily on how much money your household earns. Lenders need to see that you’re generating enough income to make the monthly mortgage payment on the property you want to buy. That amount will vary depending on the price of the home.
For example, a $60,000 annual income might be enough to get the mortgage you need for a $250,000 condo in Edmonton. It won't be enough if your sights are set on a $900,000 townhouse in Toronto.
Income doesn’t just determine how much you can afford to put toward a mortgage each month. It also affects how much you’re able to save for a down payment.
Down payment
Even though Canada has minimum down payment requirements, you may be required to put down more to improve mortgage affordability.
Once a mortgage broker or lender looks at your finances, including your current down payment savings, they'll decide how much they're willing to lend you. If that amount falls short of what you need, one option is to increase your down payment, which decreases the size of your mortgage.
Making a larger than required down payment can also improve affordability by helping you qualify for the best mortgage rates.
Mortgage default insurance
Mortgage default insurance has a sneaky way of eroding affordability. Unlike home or car insurance, which are separate costs from the item being insured, mortgage default insurance gets added to your mortgage. It increases the size of your mortgage payments and the amount of interest you pay.
You're required to purchase mortgage default insurance if your down payment is worth less than 20% of a home's sale price. The larger your down payment, the lower your mortgage default insurance premiums — another reminder of how much your down payment savings can impact mortgage affordability.
Here's an example using a $500,000 home that shows how mortgage insurance impacts how much house you can afford.
Scenario 1
Down payment: $100,000 (20%).
Mortgage insurance premium: $0.
Total mortgage amount: $400,00
Scenario 2
Down payment: $25,000 (5%).
Mortgage insurance premium: $19,000.
Total mortgage amount: $494,000
The mortgage stress test
The mortgage stress test has a tremendous impact on how much house you can afford. With the stress test, it’s not enough that you qualify at your lender’s offered rate. You must be able to qualify at whichever of the following two rates is higher:
A rate of 5.25%.
The interest rate offered by your lender plus 2%.
If a lender offers you a five-year fixed mortgage rate of 5%, you actually need to qualify at 7%. If you can’t, you’ll be offered a smaller mortgage amount, which will decrease how much house you can afford.
If the stress test reduces affordability, you'll need to increase your down payment or find a less expensive home that meets your needs.
Your debts
The amount of debt you're carrying impacts how much lenders are willing to loan you, so it has a direct impact on mortgage affordability. Lenders might evaluate your debt load using two different figures: your debt service ratios and your debt-to-income ratio.
Debt service ratios
Gross debt service ratio: Your GDS is calculated by comparing your housing expenses to your pre-tax income. Lenders don’t want this ratio to exceed 39% of your gross (pre-tax) income.
Total debt service ratio: Factors in your GDS and any other outstanding debt payments, such as student loans and credit card debt. Your TDS shouldn’t exceed 44% of your gross income.
When buying with a partner, lenders will look at your combined ratios as opposed to individually. What that means is that even if one of the purchasers has a GDS or TDS that exceeds the limit, you may still qualify for a mortgage as a couple.
Debt-to-income ratio
Your debt-to-income ratio (DTI) measures the percentage of your income that goes toward debt. In general, lenders typically want to see a DTI well below 50%, with ratios in the 30s being ideal.
To calculate your DTI, just divide your total monthly debt obligations by your gross monthly income.
Amortization period
Choosing a longer amortization period, or how long it takes you to pay off your mortgage in full, can assist in improving mortgage affordability — in the short-term, at least.
The longer you extend your amortization period, the smaller your monthly payments become. This can be a useful strategy for lowering your monthly mortgage costs, but it will result in a longer, more expensive mortgage due to the additional interest you’ll pay.
You can use a mortgage amortization calculator to see the effects of different amortization periods.
Other mortgage affordability factors
While the above factors formally determine how much money you can borrow, they may not actually translate to what you can afford. It’s essential to budget for each of the following expenses, too:
Closing costs. Generally speaking, you should set aside 1.5% to 4% of a home’s purchase price to cover closing costs, which include things such as legal and land transfer fees. A closing costs calculator can help get a better estimate of this expense.
Maintenance fees. If you buy a condo or townhouse, you may have to pay a maintenance fee every month you own your property. Lenders factor some of these costs into their underwriting.
Taxes and utilities. These annual and monthly costs, including property taxes and land transfer taxes, need to be accounted for.
Commuting costs. If you choose to buy a house in a community away from the one you work in, you need to factor in the cost of getting to your job. Will you be filling up your gas tank an extra time or two a week? Will you be taking public transit? These costs can really add up.
Moving costs. You might need to pay movers when you buy, and you may need to buy new household necessities like furniture.
Personal spending. How much you spend on non-housing expenses — kids, fun, travel, shopping — may need to be adjusted if you plan on paying off a mortgage.
Other expenses will inevitably come up while you own your home, so you may not want to borrow the maximum amount a lender offers you. When determining your overall budget, consider using after-tax dollars to give you a more realistic idea of how much money you’ll have access to each month.
More mortgage calculators to inform your home buying decision
How can I improve mortgage affordability?
Maximize your income
Lenders need to see evidence that your income is both stable and sufficient enough to cover the cost of a mortgage. The longer you’ve been employed the better. Ideally, you will have at least two years of stable work history at the same company to prove your income.
Not all income is equal in lenders' eyes. It can be easier to apply when you have a salaried position as opposed to a self-employed income stream, although many B lenders can help self-employed home buyers get mortgages.
If getting a larger mortgage requires earning more income, you may want to consider taking on a side hustle, or purchasing a home that has a rental suite. Some of the income generated from renters can be added to your eligible income.
Have a strong credit score and credit history
Your credit score and credit history play a huge role in determining mortgage affordability.. A high credit score proves to lenders that you can reliably take on debt and pay it off consistently.
A high credit score helps you qualify for the best mortgage rates. That’s why it’s advisable to take a peek at your credit score before reaching out to lenders to determine whether you should try to improve it.
Searching for a mortgage with a credit score below 600 could mean dealing with alternative or private lenders who typically charge far higher interest rates than chartered banks.
Boost your down payment savings
Paying off more of your home up front is generally a good strategy. You’ll borrow less, pay less in interest, and if the market goes sideways or you have to sell earlier than anticipated, you’ll have more equity to lean on.
Coming to the table with more savings can also improve affordability by making you look like less of a credit risk. Lenders may offer you lower mortgage rates and better loan terms.
Pay down your debt
Coming to a lender with manageable debt service ratios can help you get offered a lower interest rate and secure a more affordable mortgage.
In order to qualify for a mortgage, your gross debt service ratio should be lower than 39% of your pre-tax income and your total debt service ratio should be under 44%.
Improving mortgage affordability if you’re a first-time home buyer
If you’re plotting out your first home purchase and are worried about how much house you can afford, familiarize yourself with the programs that help first-time home buyers, such as the Home Buyers Plan and the First Home Savings Account.
4 ways to estimate mortgage affordability
In addition to using a mortgage calculator, there are other ways to estimate how much mortgage you can afford.
1. Get prequalified for a mortgage
Mortgage pre-qualification is a casual process, often done online, that works an awful lot like a mortgage affordability calculator. You provide some general financial information and a lender tells you how much they might loan you without performing a hard credit check.
Because pre-qualification is simple and quick, the amount you’re pre-qualified for is intended as an estimate. It might be identical to the amount you ultimately get approved for, but there’s no guarantee. That’s what pre-approval is for.
2. Get pre-approved for a mortgage
With a mortgage pre-approval, a lender will take a much closer look at your finances and provide an actual mortgage offer, including a principal amount and interest rate, that will be in effect for up to 120 days.
With pre-approval, you’ll be asked to provide several documents, including banking and employment information, that your lender will then verify. You’ll also have to consent to a hard credit check so your credit score and credit history can be evaluated.
It’s a lot more work than a mortgage pre-qualification, but pre-approval is a necessary step in the home buying process. Once you’re pre-approved, you’ll be able to bid confidently on a home that you know you can afford.
3. Add up your down payment savings
A 5% down payment is required for any home worth $500,000 or less. If you have $25,000 saved, the most expensive home you can buy is $500,000. If you’ve saved less than that, multiply your savings by 20 to get a general sense of how much house you can afford.
If your savings are between $25,000 and $125,000 your maximum mortgage amount will fall between $500,000 and $1.5 million. To find out how much house you can afford in this scenario:
Start by finding a home you like in this price range.
Multiply the first $500,000 by 0.05 and the remaining amount by 0.1.
Add those numbers together. That’s the minimum down payment you’ll need to purchase this property.
All homes priced above $1.5 million require at least a 20% down payment — $300,000 or more.
4. Calculate your debt service ratios
A more math-intensive way of estimating affordability is to apply the debt service ratios lenders use to your own finances. To do these calculations, you’ll have to input amounts for the mortgage principal and interest charges:
For GDS, add up the monthly mortgage cost (principal and interest), property taxes and heating costs. Divide that figure by your gross monthly income. Most lenders want to see a number below 39%.
For TDS, add up the monthly mortgage cost, property taxes, heating costs and your other debt obligations. Divide that number by your gross monthly income. Lenders generally want TDS to be below 44%.
If your GDS calculation doesn’t exceed 39% and your TDS is lower than 44%, you can recalculate using higher mortgage costs until you hit those limits.
Review: How much mortgage can I afford?
Here are two simple scenarios that can help you understand how the various factors we discussed above impact how much mortgage you can afford.
Scenario 1:
You have a monthly income of $5,000 and $50,000 in down payment savings. You want to buy a house that costs $250,000. To determine how much mortgage you might qualify for, lenders would consider your financial obligations, such as:
Estimated heating costs: $150/month.
Estimated property taxes: $200/month.
Monthly credit card payments: $100/month.
Monthly car payment: $350/month.
In this simplified scenario, you will likely be able to afford this home. You should qualify for the needed mortgage amount of $200,000.00, since your GDS ratio (30.84%) does not exceed 39% and your TDS ratio (39.84%) does not exceed 44%.
Scenario 2:
You have a monthly income of $5,000, with $35,000 in down payment savings. The home you want to buy costs $350,000. Your financial obligations are the same as in Scenario 1.
In this simplified scenario, you’ll likely be denied the necessary mortgage amount of $324,765 ($315,000.00 + $9,765.00 in mortgage insurance premiums because your down payment is less than 20%), because your GDS ratio (45.71%) exceeds 39% and your TDS ratio (54.71%) exceeds 44%.
Common questions about mortgage affordability
- What is mortgage affordability?
When you calculate mortgage affordability, either by yourself or by using a mortgage affordability calculator, you’re answering the question “How much mortgage can I afford?”
Finding out how much house you can afford isn’t just a matter of subtracting a mortgage payment from your monthly income; you’ll also have to account for your debt load and credit history — which can both influence your mortgage rate — as well as the mortgage stress test and various closing costs.
- Why should I use a mortgage affordability calculator?
Even though a mortgage affordability calculator won’t tell you the exact amount a lender might loan you, it can still be a useful tool. If a calculator gives you a result that doesn’t align with home prices in your area, it could be a sign that you need to save a larger down payment or pay down some of your debts.
And if a mortgage affordability calculator shows that you can afford a mortgage big enough to cover the cost of homes you’d like to buy, you’ll know that you’re probably on the right track. It might even be time for you to get pre-approved.
- Will a mortgage affordability calculator tell me how much mortgage I'll be approved for?
A mortgage affordability calculator will not tell you exactly how much mortgage a lender will ultimately approve you for. That’s because lenders look at factors like your credit score before determining what mortgage interest rate to offer you. The interest rate greatly influences the overall cost of your mortgage.
A mortgage affordability calculator also can’t perform a stress test or assess any past blemishes that might be on your credit report. Only mortgage professionals can do that.
- How much of my salary should go toward a mortgage payment?
It’s recommended that no more than 32% of your gross salary should go toward housing expenses, including your mortgage principal and interest, property taxes, heating and, if applicable, half of your monthly condo maintenance fees.
Some might refer to this figure as your “mortgage-to-income ratio,” but it’s also similar to how lenders calculate your GDS ratio.
- How can I use my RRSP to improve mortgage affordability?
With the Home Buyers’ Plan (HBP), you can use up to $35,000 of your RRSP savings to help fund your first home purchase. The HBP can significantly increase your down payment, which will improve affordability.
- What will increase mortgage affordability more, a high-ratio mortgage or a low-ratio mortgage?
If you have to borrow more than 80% of a home’s purchase price, you will need a high-ratio mortgage. A low-ratio mortgage involves a home loan worth less than 80% of a home’s purchase price.
Low-ratio mortgages will generally be more affordable since you’ll be borrowing less money and won’t have to buy mortgage default insurance.
- What's the difference between mortgage affordability and mortgage qualification?
When trying to establish mortgage affordability, either on your own or by using an affordability calculator, keep in mind that the results may not be the same as what you qualify for at an actual lender.
Affordability is just one piece of the qualification puzzle.
For example, if you earn a high income and keep your additional spending to a minimum, but have a low credit score, lenders may not approve you for the mortgage you want. Instead, they may offer you a higher mortgage rate to hedge against the risk of dealing with someone with poor credit. That will increase the cost of your mortgage and reduce the amount you can borrow.
The only way to truly know how much mortgage you can afford is to let a mortgage broker or lender take a magnifying glass to your finances and tell you what they see.
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Clay Jarvis
Kurt Woock
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