How to Determine What You Can Afford

Before you begin your search for a new home, you’ll need to determine what you can afford. You’ll also need to be aware of additional costs that are associated with purchasing a home such as maintaining the property, paying insurance, etc. Factors such as your income, credit score, down payment, debt, etc. can all effect the maximum mortgage you’ll be eligible for and how much you can spend.

There are two main factors to determining mortgage affordability, your down payment, and your debt service ratios (DSR).

Down Payments

In order to purchase a home, you will require a down payment. In Canada, there are minimum down payment requirements for real estate transactions. You will require a down payment of:

  • 5% for purchases up to $500,000.
  • 10% for purchases between $500,000 and $1 million dollars.
  • 20% for the purchase price of homes valued over $1 million dollars.

For example, if you have a down payment of $20,000, the maximum home price you will be able to afford is $20,000 divided by 5%, or $400,000.

Debt Service Ratio

Your debt service ratios are used to calculate the maximum mortgage a lender can offer you. There are two debt service ratios that are considered, the Gross Debt Service Ratio and the Total Debt Service Ratio.

Gross Debt Service Ratio (GDS) includes your mortgage payments + property taxes + heating costs + 50% of condo fees (if applicable), divided by your annual income. This total should be less than 32% of your total household income.

Total Debt Service Ratio (TDS) includes your housing expenses (per GDS)+ credit card interest + car payments + loan expenses divided by annual income. This total should be less than 40% of your total house hold income.

Your debt service ratios are combined with your down payment to determine the maximum home price you can afford to purchase. The purpose of this is to make sure you can consistently make your monthly payments.

To continue with the example above, even if you have a down payment of $20,000, your debt service ratios score may only approve you for a $350,000 mortgage.

At the end of the day, your GDS and TDS ratios are just guidelines. Whenever possible, you should avoid borrowing to the maximum.

To determine what mortgage you can afford, use this helpful calculator

Mortgage Calculator

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