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A mortgage affordability calculator uses your income, debts and living expenses to determine how much money you can borrow to buy a home.
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.
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?
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.
To use the mortgage affordability calculator, you’ll need to gather the following information:
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.
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).
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%.
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.
If you want to determine your maximum purchase price, you’ll also have to include your down payment in your calculations. For example, if you have a down payment of $25,000 and have been approved for a mortgage of $475,000, you should be able to purchase a property priced at $500,000. (Don’t forget to factor in all the other costs associated with buying a property in Canada). However, with another $25,000 saved in the bank (for a total down payment of $50,000) your maximum purchase price would increase to $525,000—even with the same mortgage. Remember, there are government rules that dictate the minimum you must have as a down payment.
Finally, keep in mind that your future home will come with expenses, including many not included in mortgage affordability calculations. Make sure that the amount a mortgage lender is willing to loan you is in line with what you feel comfortable paying every month. Before applying for a mortgage, create a detailed list of all your expenses, including things like your groceries, bills and transportation costs, to ensure your future mortgage payments will fit comfortably within your budget.
If you find that your maximum affordability is lower than you expected, here are some reasons that might be—and what you can do about it.
If your total house-hunting budget is your concern, you have one other option—putting a bigger down payment will grow your budget, without increasing the size of your mortgage. (A first-home savings account, FHSA, could help with that.) If you’re having trouble saving for a larger down payment, consider accessing up to $35,000 in RRSP funds through the Home Buyers’ Plan (if you’re a first-time home buyer) or asking a family member for a monetary gift.
To ensure mortgage payments fit comfortably within your budget, you can also work to lower your monthly payments on the same mortgage amount.
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