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Mortgage affordability is an essential part of setting up your home-buying budget, and it’s based on a many factors—more on those later. If you’re looking to buy a home, one of the first things you’ll want to know is your mortgage affordability. And for that, you should start by consulting an online calculator.

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What is mortgage affordability?

When people say “mortgage affordability” they’re referring to the maximum mortgage amount someone can afford to borrow, based on their gross income, debt payments and living costs. In short, the higher your mortgage affordability amount, the more money you could borrow to buy your new home. 

What factors help to determine mortgage affordability? These include your gross household income, the monthly expenses associated with the property you want to buy (think: mortgage payments, property taxes, heating costs and condo fees), as well as your debt obligations (credit card payments and car loans). When you complete a mortgage application, the lender may also take your credit history into account.

Watch: What is mortgage affordability?

Why should you use a mortgage affordability calculator? 

Using a mortgage affordability calculator is an important first step towards determining how much you can spend on a home. These calculators take your gross income, debts and other living expenses to calculate the maximum amount you can borrow as a mortgage. Together, your down payment and mortgage amount will give you an estimate of the maximum you can spend on a home. This, in turn, can help you decide if buying real estate makes sense for you financially. It can also help to narrow the search for your dream home.

With a mortgage affordability calculator, you can play with the inputs to see the impact they have on your maximum affordability. For example, by paying down debt (which reduces your overall debt load), you should be able to obtain a larger mortgage. Similarly, a jump in household income will allow you to borrow more money, too.

Since these calculations are based on averages, it’s good practice to confirm what you can afford on a mortgage with a mortgage lender, who will take the nuances of your financial situation into account. For example, if you have a credit score that’s under 600, you may have difficulty qualifying for a mortgage from a top-tier lender and may need to consult alternative lenders, which a mortgage broker can help with.

How does it work?

To use the mortgage affordability calculator, you’ll need to gather the following information:

  • Your income
  • Your co-applicant’s income (if applicable)
  • Your monthly debt payments, including credit cards, car payments and other loan expenses
  • Your expected monthly living costs in your new home, including property tax, condo fees and heating costs, as applicable

These factors are used by lenders to calculate two ratios that serve as guidelines in determining how much you can afford. They are called the gross debt service (GDS) ratio and the total debt service (TDS) ratio. 

Gross debt service ratio

Your GDS ratio is based on your monthly housing costs (mortgage principal and interest, property taxes and heating expenses and condo fees, if applicable), divided by your gross household income (calculated on a per-month basis). For example, let’s say you have a gross household income of $100,000 per year. If your new home costs you $3,000 per month, you would have a GDS ratio of 36%. Your GDS ratio cannot exceed 39%, according to the Canada Housing and Mortgage Corporation (CMHC).

Total debt service ratio

The other ratio used to calculate affordability is your TDS ratio. This ratio takes the above housing expenses and adds your credit card interest, car payments and other loan expenses, then divides it by your gross household income (calculated on a per-month basis). For example, if your household brings in $100,000 per year, your housing costs amount to $3,000 per month and you spend $500 per month on other debts, you would have a TDS ratio of 42%. For the home to be affordable according to CMHC, your TDS ratio cannot exceed 44%.

Mortgage affordability versus your maximum purchase price

There’s a difference between how much you can afford to borrow for your mortgage and the maximum you can (or should) spend on a home. 

Jordann Brown

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