Maximum affordability

Mortgage affordability and your down payment

Because Canada has minimum down payment rules in place, the amount of money you've saved for a down payment can limit your maximum mortgage affordability. The minimum down payments in Canada are:

• 5% of the purchase price up to $500,000, plus
• 10% of any part of the price between $500,000 and $1 million, or
• 20% of the total purchase price for homes valued at over $1 million.

Let's consider an example. If your down payment amount is fixed at $15,000, the maximum home price you will be able to afford is $15,000 divided by 5%, or $300,000. If your down payment is $30,000, then your maximum affordability will increase to $550,000. You can run the numbers yourself on our mortgage affordability calculator.

 

Debt service ratios and mortgage affordability

Set by the Canada Mortgage and Housing Corporation (CMHC), your debt service ratios – including your gross debt service ratio (GDS) and your total debt service ratio (TDS) – are used to calculate the maximum mortgage the lender can offer. This maximum mortgage is then combined with your available down payment to determine the maximum home price you can purchase.

Your lenders uses these ratios to ensure you can consistently make your monthly payment, as they place a limit on the amount of your income that can go towards your housing expenses and monthly debt obligations. The industry standard guideline for GDS is no more than 32% and the guideline for TDS is no more than 40%. However, you may be allowed to exceed these limits if you have a stable source of income and good credit. If the mortgage you want to take on forces your GDS or TDS above 39% and 44% respectively, you will not be approved for that amount.

To use our earlier example, even if you have $15,000 for a down payment, your GDS and TDS score may only approve you for a $250,000 mortgage. Thus, when combined with your $30,000 down payment, your maximum affordability would be $265,000 ($250,000 + $15,000).

The maximum GDS limit used by most lenders to qualify borrowers is 39% and the maximum TDS limit is 44%.

On July 1st, 2020, the CMHC implemented new GDS and TDS limits for mortgages that it insured. The new GDS/TDS limits for CMHC-insured mortgages was 35/42. However, on July 5, 2021, the CMHC reversed the new rules and reverted to the previous GDS/TDS limits of 39/44. It is noteworthy that none of the private companies providing mortgage default insurance in Canada did not follow suit to make the requirements more stringent - as a result, these private insurers' market share has increased dramatically at the expense of the CMHC. 

 

How to increase your maximum mortgage affordability

If you’ve used our mortgage affordability calculator and you’re unhappy with your results, there are several steps you can take to increase your mortgage affordability:

• Increase your down payment: This will give you the ability to increase your affordability and purchase a more expensive home. Many Canadians do this with family assistance, also known as borrowing from the Bank of Mom and Pop. 
• Pay off your debts: This will lower your TDS ratio and free up more of your income for your mortgage payment, ultimately giving you the ability to carry a larger mortgage and therefore afford a more expensive home.
• Increase your income: This is the tougher option, but it will allow you to afford a larger monthly mortgage payment, which will increase the overall size of the mortgage you can afford to borrow and repay. One way to do this is by switching to a better-paying job, but changing jobs during the homebuying process can be risky. Alternatively, you can apply for your mortgage with your partner, or get a co-signer, such as your parents, to guarantee your mortgage.

Maximum affordability vs. what you should actually spend

Your GDS and TDS ratios are just guidelines, and you do not have to borrow the maximum amount possible. According to Mortgage Professionals Canada, as of the end of 2022, 6% of Canadian mortgage-holders were already struggling with servicing their mortgage payments, while 20% would struggle if their mortgage payments went up by even 10% or less. As homeowners use more and more of their income to service their mortgage payments, they are left them vulnerable to job loss and interest rate increases.

Some industry experts have even suggested that the traditional TDS formulas be amended to include a 10% savings buffer. This concept has gained traction and even earned the nickname the Total Debt Service + Savings (TDSS) ratio². When deciding what your maximum purchase price is going to be, it’s important to make sure that you have enough room left over in your budget to pay down debt, save for the future and weather interest rate increases and job loss.

 

A sample maximum affordability calculation

Let's look at an example where your gross annual income is $75,000. You're buying a home with annual property taxes of $3,600, monthly heating costs are $200 and, since you're buying a house, there are no condo fees. In addition to your housing expenses, you have a monthly car loan at $300 and must make minimum monthly payments of $250 on your credit card debt. You have $20,000 saved up for a down payment.

Step 1 : Determine your maximum affordability based on your GDS score

   $75,000 (annual income)

x 32% (your GDS ratio)

= Max spend: $24,000 

   $24,000 (max spend)

- $3,600 (property taxes)

- $2,400 (annual heating costs)

= Max mortgage payments: $18,000

   $18,000 (max mortgage payments)

÷ $12 (months in the year)

= Max monthly mortgage payment: $1,500 

 

Step 2 : Determine your maximum affordability based on your TDS score

   $75,000 (annual income)

x 40% (your TDS ratio)

= Max spend: $30,000 

   $30,000 (max spend)

- $3,600 (property taxes)

- $2,400 (annual heating costs)

- $3,600 (annual car payments)

- $3,000 (credit card payments)

= Max mortgage payments: $17,400 

 

Since both your GDS and TDS ratios must be less than or equal to the maximum, the largest mortgage payment you can afford is $1,450. Though your GDS suggests you can afford $1,500, at that monthly payment, your TDS will be over 40% and therefore $1,450 is the maximum payment that ensures both debt service ratios fall within the allowable range.

With a monthly mortgage payment of $1,450 per month, you can afford a $300,000 mortgage with a 5-year fixed interest rate of 3.28% and an amortization period of 25 years. Finally you must ensure you have the minimum down payment of 5%. Since $20,000 / $300,000 = 6.67% you can satisfy the minimum down payment requirement.

After calculating your GDS ratio, TDS ratio and down payment percent, you can determine your maximum affordability at $300,000. Since your TDS ratio is limiting your affordability, you could try paying off some of your credit card or car debt to increase your maximum affordability.

 

References and Notes

1. CMHC: Fall 2022 Residential Mortgage Industry Report
2. Pay your mortgage and save too? Here’s a formula to build your wealth, The Globe and Mail, 2013-01-30
3. CMHC reviews underwriting criteria
4. State of the Housing Market: 2022 Year-End Consumer Survey & Outlook, Mortgage Professionals Canada