Understanding mortgage affordability

What does mortgage affordability mean?

Mortgage affordability refers to how much money a person can borrow to purchase a home. It’s a figure based on their household income, future living expenses (i.e. the mortgage payments, heating costs and property taxes associated with the potential home) and their current debt payment obligations. Simply put, the higher your mortgage affordability, the more money you can afford to borrow as a mortgage for your house purchase. 

You might be wondering how this translates to what you can spend on your home. While your mortgage affordability and your maximum budget are closely related, they will not be the exact same dollar amount. When it comes to your house-hunting budget, you’ll also have to take your down payment into account. 

Together, your down payment and your mortgage amount determine your maximum purchase price. For example, if you have $100,000 as a down payment and expect to get another $400,000 from a lender for your mortgage, you should be able to purchase a home for around $500,000. (Remember to factor in the many other costs that come with buying real estate, such as closing fees and mortgage insurance.)

Watch: What is mortgage affordability?

How is that different from housing affordability?

Another important consideration when buying a home is the affordability of your future home city relative to others. In this case, “affordability” refers to the cost of living (including rental costs and real estate prices) relative to the average income in a given part of Canada. If housing costs are high compared to local incomes, the area is considered a less affordable place to live. 

Cities like Toronto, Vancouver and Hamilton are considered less affordable housing markets because prices have outpaced the average salary. In contrast, average salaries are more in line with housing costs in places like Saskatoon and Regina, which makes these cities more affordable.

Here’s one way to think about it. In the city of Toronto, the average home cost $1,242,700 in January 2022—nearly 25 times the 2019 average per capita income of $49,800—according to Statistics Canada and Toronto Regional Real Estate Board data. Meanwhile, across Ontario, where the average person made $49,500 per year in 2019, the average home sold for $998,629 in January 2022—or roughly 20 times the average income. That means Toronto is less affordable than other cities in Ontario, if we assume wages have increased at the same rate in both regions. 

The affordability divide is even larger between Toronto (and other high-priced markets, such as Vancouver) and the rest of the country. The national average cost of a resale home in Canada was $713,542 in December 2021, according to the Canadian Real Estate Association, or a little more than 14 times the national average income of $49,000. Here’s a table showing those numbers together.

A housing market’s affordability is reflected in the property cost-to-income ratio. The higher the ratio, the more difficult it will be to buy a property on the average person’s salary in that area—and the bigger the mortgage you’re likely to need. That’s why it’s important to consider this aspect of affordability when shopping for a home.

Your income’s influence on mortgage affordability

Your household income—meaning the total earned by everyone listed as owners of the home—has a big impact on mortgage affordability. This is because, when applying for a mortgage, lenders will want to assess how much of your household’s monthly income is going towards your mortgage payment (and how much you have leftover for other debts and expenses). 

With the same down payment, the price you pay for a home will directly impact the proportion of your income used to service your mortgage debt, and lenders put a cap on how high that percentage can be. 

It’s these general rules that allow us to calculate the minimum you have to earn to afford a home of a certain price. For example, based on average real estate prices and other variables, such as a given amortization and interest rate, we know a household needs $237,000 in income to afford a detached home in the Greater Toronto Area. And we know the same household needs $320,000 in income to afford the same kind of home in the Greater Vancouver Area. 

Debt service ratios and mortgage affordability

As noted above, lenders use percentages as guidelines to determine how much you can afford on a mortgage. 

More specifically, they look at your gross debt service ratio (GDS) and total debt service ratio (TDS). Both of these figures account for your income and monthly housing costs, but they differ in one important way. (Learn more about Canada’s climbing debt-to-income ratio.)

The GDS ratio is calculated by adding up the monthly expenses of your future property, including your mortgage payment (both the principal and interest), property taxes and heating costs. If you’re going to buy a condo, it also considers half the monthly maintenance fee. The total amount is divided by your household’s gross monthly income and then expressed as a percentage. 

The TDS ratio is similar, but in addition to your monthly housing expenses (i.e. all those listed for GDS), it also adds up any other debt you may have—such as monthly car payments, credit card interest and other loans. The total is divided by your gross monthly income, giving you a percentage. 

Lenders use the GDS and TDS ratios to assess your ability to take on and pay back debt—in this case, a mortgage. Many use the same GDS and TDS limits; however, some alternative lenders may have their own policies or make exceptions based on your financial situation and credit score. 

The Financial Consumer Agency of Canada’s mortgage qualifier tool uses a GDS of 32% and a TDS ratio of 40% as a guideline. The agency notes you “may still qualify for a mortgage even if your GDS and TDS ratios are slightly higher. However, higher GDS and TDS ratios mean that you are increasing the risk of taking on more debt than you can afford.”

Meanwhile, the Canada Mortgage and Housing Corporation (CMHC), Canada’s national housing agency, says your GDS and TDS must not exceed 39% and 44%, respectively. 

I’ve calculated my mortgage affordability. Now what? 

While these guidelines can be helpful in figuring out how much you can afford, Sean Cooper, mortgage broker and author of the book Burn Your Mortgage, is skeptical of putting too much weight behind mortgage affordability calculations alone, especially when looking to purchase in the major cities.

“If you’re buying in a more affordable city like Winnipeg, [falling within the guidelines] may be achievable,” he says. “But if you’re willing to hold yourself to a form like that and try to buy in Toronto and Vancouver, you’ve got to have a household income of $200,000 [or more], which many people don’t have.”

Beyond looking at debt ratios and using mortgage affordability calculators, Cooper believes additional budgeting is needed to truly understand what you can afford. Mortgage affordability guidelines “rely on before tax amounts, so they don’t take into account things like taxes and other deductions like CPP and EI,” he says. “Another big shortcoming is that they don’t factor in other expenses that you might have, like childcare, which [can be] very costly.”

“Find out if you can really afford the amount that you’ve been pre-approved for,” says Cooper. He suggests creating yourself a mock budget for when you own the property. When you make it, add in the entirety of your hypothetical expenses—from your mortgage payments to childcare, utilities, home insurance and living expenses—to see if it’s really feasible.

This final step is integral—just because you’ve been pre-approved for a million-dollar mortgage, doesn’t mean you can truly afford to take one on.

Read more on mortgages:

• What home buyers should know about the Canadian mortgage stress test
• What is a mortgage broker?
• Would I be better off renting?
• How to get a mortgage with bad credit

About Justin Dallaire

Justin Dallaire is the senior editor at MoneySense.ca. He was previously an editor at Strategy magazine and has a master’s degree in journalism from Toronto Metropolitan University.

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