How much can you afford to borrow?
June 28, 2020

How much can you afford to borrow?

Knowing how much you can afford to borrow for your dream home lets you shop with confidence and plan your budget before you start going to open houses.

As you think about your budget and how much you can afford to borrow, there are three ratios you should know about. These are used by most banks to determine how much money you can borrow while meeting all of your financial obligations.

To begin, you’ll need to estimate your monthly mortgage payment. Then, use the ratios below to estimate whether you qualify for the full mortgage amount you need.

Understand your debt service ratiosPassing the Stress Test

These ratios compare how much you make to how much you spend.

The Canada Stress Test is an additional layer of protection.

The Gross Debt Service (GDS) Ratio

You should need no more than 32% of your gross annual income to pay for:

  • Your mortgage principal and interest costs
  • Property taxes
  • Heating costs
  • 50% of condo fees (if applicable)

Total Debt Service (TDS) Ratio

You should need no more than 40% of your gross annual income to pay your mortgage plus all of your other household expenses including:

  • Credit card interest
  • Car payments
  • Loan(s) and line(s) of credit

Calculate your GDS and TDS on the Government of Canada website.

Canada Stress Test

The Government of Canada’s mortgage stress test is designed to answer the question, “Could you still afford to pay your mortgage if interest rates go up?”

To pass the mortgage stress test, you’ll need to qualify at the mortgage interest rate you are applying for plus 2% or the Bank of Canada’s current five-year benchmark rate, whichever is greater.

For example, if you’re applying for a mortgage at a rate of 3.25%, you’ll need to still qualify as if the rate was 5.25% (3.25% + 2%).

The amount you’re approved for can’t be lower than the Bank of Canada’s five-year benchmark rate.

Today’s rate

The GDS/TDS ratios are more restrictive for high-ratio mortgages. All high-ratio mortgages have to be approved by the insurer before the lender can approve the mortgage. Note that homes costing more than $1 million are not eligible for high-ratio mortgages; for these homes, you must have a down payment of at least 20 per cent and qualify for a conventional mortgage.

Calculating your gross annual income

These ratios depend on you and your mortgage specialist having a good handle on your income and expenses. Here’s what to include:

Adding up your Gross IncomeAdding up your Expenses

This should include all sources of income before taxes are deducted.

  • Salary
  • Bonus
  • Commissions
  • Investment income
  • Rental income

Here are some of the most common expenses. You may have more or less. Be sure to include monthly savings to make sure you contribute to all of your financial goals.

  • Credit card(s), Line of Credit and Loans
  • Internet, cell phone and data plans
  • Groceries
  • Entertainment
  • Clothing
  • Car lease
  • Daycare
  • Insurance (home and auto)

If your Gross Income and Expenses exceed the ratios above, you still have options. A Concentra Mortgage Specialist can help. Together, you can explore options such as:

  • Postponing your purchase until you save for a larger down payment, meaning you need to borrow less.
  • Choosing a lower mortgage amount, meaning a home that costs less.
  • Using your RRSP to add to your down payment by taking advantage of the Canadian Home Buyers Plan. See if you qualify.

Learn more about how much you can afford and how to choose the right mortgage by speaking with a Concentra Mortgage Specialist today.

The content of this article is provided for general information purposes only. It is not intended to be specific advice regarding legal, accounting, financial, or tax matters on which you should rely. You must obtain more specific or professional advice before taking, or refraining from, any action or inaction on the basis of the content in this article. We accept no liability for any loss or damages arising out of your use or reliance of the information in this article, including liability towards third parties.

© Concentra Bank, 2020
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