How Much Can You Afford For A Mortgage In Canada?

Getting approved for a mortgage and purchasing property are significant milestones in Canadian life. With rising home prices nationwide, many prospective buyers wonder how much home they can realistically afford. Calculating your mortgage affordability provides critical insight into your maximum purchasing power.

What is mortgage affordability?

Mortgage affordability refers to your ability to pay the mortgage debt based on your financial situation. It determines the maximum amount you can borrow from a mortgage lender to buy a home in Canada.

The higher your mortgage affordability, the more expensive a property you can qualify to buy. Improved affordability expands your options in Canada’s competitive housing market.

It’s essential to accurately estimate your affordability before shopping for homes. Three key advantages are:

• Affordability calculations reveal the upper limit of what you can safely borrow. This prevents disappointment from finding homes you can’t finance.
• Overestimating affordability leads buyers to stay within their means. Understanding your limits lets you set a wise budget for monthly payments.
• Mortgage principal isn’t your only expense. Affordability estimates account for mandatory down payments and closing costs.

Using our mortgage affordability calculator before meeting with lenders gives you an excellent perspective on your price range. However, pre-approval is necessary for a binding assessment.

Which factors determine mortgage affordability in Canada?

Many variables affect how much mortgage you can qualify for in Canada. Lenders scrutinize your application based on the following:

Mortgage rates

The mortgage interest rate you are offered is considered the most significant factor that impacts affordability. Higher rates diminish affordability, while lower rates reduce your principal and interest payments, allowing you to qualify for a higher loan amount.

Fixed-rate mortgages generally have higher rates than variable mortgages. According to a CMHC report, in 2024 and 2025, an estimated 2.2 million mortgages will be facing interest rate shock, representing 45% of all outstanding mortgages in Canada (source).

As a practical example, for a $500,000 mortgage with a five-year fixed-rate term and 25-year amortization, an increase in the interest rate from 2.5% to 5% could lead to a $600 monthly payment increase.

Down payment

Canada requires a minimum down payment of 5% to 20% on homes over $500,000. Your down payment savings significantly impact the mortgage principal and, thus, affordability. Putting less than 20% down also means mandatory mortgage insurance, which adds costs.

Income level and stability

Lenders want a stable income history to ensure you can make payments. Multiple years at one job look better than switching jobs often. Salaried income may be more reliable than self-employment income, as it’s easier to verify. Some lenders specialize in assisting self-employed borrowers. Lenders benchmark your earnings against national averages. Higher incomes above these medians improve mortgage affordability.

Credit score

A credit score is a three-digit number, generally between 300 and 900, indicating your creditworthiness and likelihood of repaying debts. Lower credit scores below 680 make approval difficult and lead to higher mortgage rates, reducing affordability.

Mortgage stress test

Since 2018, all Canadian mortgages must pass the mortgage stress test. This means qualifying at an interest rate higher than what your lender offers. Stress test rates are:

• Bank of Canada 5-year benchmark rate (currently 5.25%)
• Or lender’s rate + 2% (whichever is greater)

So, if offered 3% interest, you must qualify at 5% for the stress test. This protects you if rates rise but reduces maximum affordability.

Debt service ratios

Your debt service ratios compare debt costs against income:

• Gross Debt Service Ratio (GDS): Monthly housing costs ÷ Monthly income
• Total Debt Service Ratio (TDS): Total monthly debt costs ÷ Monthly income

Most lenders limit GDS to 39% and TDS to 44%. You won’t qualify for that mortgage if your debt service ratios exceed these limits. Debt service ratios directly impact affordability approvals.

Pre-qualification and Pre-approval

Online pre-qualification tools give quick affordability estimates. However, formal pre-approval involves document verification and hard credit checks for firm approval.

Pre-approval requires more work but provides guaranteed mortgage offers, which gives certainty when placing bids. Get pre-qualified first, then obtain pre-approval later in the home-buying process.

Mortgage affordability combines your financial profile with proven lending formulas and mandates.

Mortgage default insurance

Mortgage default insurance, required for down payments under 20%, is added to the principal, increasing monthly costs. It’s only available for residential homes priced under $1,500,000.

Typical insurance premiums range from 2.4% to 4% of the mortgage amount, which impacts first-time buyers the most.

Other expenses

Closing costs, such as legal fees, moving fees, property taxes, utilities, and maintenance, must also be budgeted for in ownership costs. These reduce the amount you can devote to housing payments.

How to calculate your maximum mortgage affordability

Lenders approve mortgages up to amounts that keep key ratios within permitted limits. This establishes your maximum borrowing capacity.

You can estimate it yourself by following two steps:

1. Calculate down payment affordability

Use the minimum down payment formulas shared earlier to determine the maximum home price your current savings support.

• If the down payment is $25,000 or less: Maximum affordability = Down Payment ÷ 5%

For example, if your down payment is $20,000, your maximum purchase price is $400,000

• If the down payment is more than $25,000: Maximum affordability = (Down Payment – $25,000) ÷ 10% + $500,000

For example, with a $60,000 down payment, the maximum price you could afford is ($60,000 – $25,000) ÷ 10% + $500,000 = $850,000

2. Calculate GDS & TDS affordability

Tabulate your monthly housing costs, income, and existing debts. Increase hypothetical mortgage amounts until GDS hits 39% and TDS hits 44%. That’s your maximum approval amount.

However, lenders also consider your credit score, income stability, assets, and additional recurring costs. So, your actual maximum mortgage may be lower than these calculations.

It’s wise to stay within reasonable GDS and TDS limits to manage overall expenses; just because you qualify for the maximum mortgage, it doesn’t mean you can spend less.

How to improve your mortgage affordability

If your initial affordability is lower than hoped for, several strategies can help optimize it:

• Save a larger down payment: Increasing your down payment percentage unlocks higher maximum mortgages and offers better rates.
• Pay down existing debts: Reducing the debt load lowers your TDS ratio for affordability. Pay off credit cards and loans.
• Shop mortgage rates and use a broker: Compare rates across multiple lenders and negotiate with a broker for the lowest rate. This directly increases your buying power.
• Lengthen amortization period: Longer mortgages (up to 30 years) reduce monthly costs but increase the total interest paid over time.
• Increase your income: A higher, stable income directly raises affordability capacity. Consider improving your career earnings.
• Get a co-signer: Adding a cosigner combines your income with higher qualifications. But they become liable for the mortgage if you default.

Consulting a mortgage broker provides experienced guidance on the best strategies for your situation. Now, let’s examine the calculation of maximum affordability.

Special considerations for first-Time home buyers

First-time home buyers have additional affordability challenges to overcome, but specialized programs can help.

The Home Buyers Plan allows you to withdraw up to $60,000 from a Registered Retirement Savings Plan (RRSP) for your down payment without tax penalties. This helps savers boost their down payments quickly.

Getting pre-approved is highly recommended for first-timers. This provides certainty when making an offer in competitive markets. Budget carefully for ownership costs beyond your mortgage, like maintenance and closing fees. The First Home Savings Account helps buyers under 40 save for these expenses in a tax-advantaged way.

Ongoing changes impacting mortgage affordability

Canada’s housing market experiences frequent developments that influence mortgage affordability:

• The mortgage stress test rate rises and falls with the Bank of Canada’s trends. Higher stress test rates reduce maximum approvals.
• CMHC briefly tightened maximum debt ratio requirements due to limited impact and loss of market share.
• Rising home prices across Canadian real estate markets have outpaced incomes, progressively diminishing affordability, especially for first-time home buyers.

You should regularly review mortgage rates, housing prices, debt ratios, and affordability to stay informed and appropriately time your entry into the market.

FAQs about Mortgage Affordability

The bottom line

Buying property is a significant financial commitment. Thus, it is important to accurately estimate your affordability before meeting with lenders to prevent disappointment.

The advisor at BestMortgageOnline can help you feel fully confident in your mortgage affordability potential. With proper planning, research and professional mortgage advice, you can make the dream of home ownership in Canada a reality. Contact us today!