So you want to buy a house - congratulations! But, unless you can pay for the entire property in cash, getting the keys to your own place is going to be a long road, and it’ll start with getting a mortgage.
When you first start looking for a mortgage, one of your first questions will probably be: how much can I afford? Of course, a good mortgage broker is a great place to start looking for answers (we have a searchable list of brokers), but it also helps to understand how banks or other mortgage lenders will work out how much they’ll let you borrow.
A good place to start is with our How much can I afford? calculator.
When a lender sets out to decide how much they’ll let you borrow for a mortgage, they will calculate how much they think you can afford to repay. Each lender has their own formula so it’s a good idea to use a mortgage broker, as they should be able to help you by letting you know which lender will give you the mortgage you want.
Mortgage lenders generally want to be able to see that your monthly costs, including your mortgage repayments, are less than 32 per cent of your monthly income. This means that for every $100 dollars you earn, a lender will only want you to be paying $32 in mortgage repayments.
For example: Let’s say “Sofia” earns $140,000 each year. Let’s also assume that, with the house she wants to buy, she’ll pay $150 in monthly property tax and $150 in monthly heating costs. Currently, she pays $500 each month to repay other loans like her auto loan and credit cards.
With a $30,000 down payment, this is what each of the Big Five banks might loan Sofia over 25 years if interest rates are 4.79 per cent.
| INSTITUTION | CIBC | TD Canada Trust | RBC Royal Bank | Scotiabank | CHMC |
| Down payment | $30,000 | $30,000 | $30,000 | $30,000 | $30,000 |
| Value of home you can afford | $300,000 |
$499,320 |
$480,799 |
$486,730 |
$499,291 |
| Mortgage required | $270,000 |
$469,320 |
$456,759 |
$456,730 |
$469,291 |
| Monthly payments | $1,538 |
$2,673 |
$2,602 |
$2,602 |
$2,673 |
*All figures are estimated. Final approval depends on your credit rating.
By this comparison, you can see just how different the five largest lenders are, which is why it’s always good to get the help of a mortgage broker - they also have access to many other mortgage lenders too. We have a searchable find a broker database, or we can get a mortgage advisor to give you a call and discuss your options - click to request a callback.
In order to determine whether or not Sofia can actually afford the monthly mortgage payments, a mortgage lender will calculate her debt-to-income ratio.
Debt-to-income ratio
What is it? A debt-to-income ratio is a measure of how much of what you earn goes to pay debts each month. Mortgage lenders use two different measures.
The first one is called a Gross Debt Service (GDS) ratio. Mortgage lenders use this calculation to determine how large a mortgage you’ll be able to handle. The GDS ratio compares your income to your housing expenses, such as your mortgage payments, heating costs, property taxes and condo fees.
For example: Let’s say “Tiffany” makes $4,500 per month. To calculate her GDS ratio, we’ll add her monthly mortgage payment (which we’ve calculated using our mortgage repayment calculator), her monthly property taxes, and her monthly heating costs, and divide that by her income.
Tiffany’s monthly housing expenses
$1,150 (monthly mortgage payment)
$150 (monthly property taxes)
$100 (monthly heating costs)
+ $0 (one-half condo fees)
------------------------------------------
$1,400 (total monthly housing costs)
÷ $4,500 (gross monthly income)
------------------------------------------
= 0.3111
Multiply that by 100 and you get a GDS of 31.11%
The second ratio that mortgage lenders use is a Total Debt Service (TDS) ratio. This is the same as a GDS ratio, except it also includes credit repayments that you have to make every month, such as credit card payments, car payments, and other loans.
For example: Let’s use the same example as above, but this time we’ll include Tiffany’s $350 per month in student loan debt.
Tiffany’s monthly expenses
$1,150 (monthly mortgage payment)
$150 (monthly property taxes)
$100 (monthly heating costs)
+ $0 (one-half condo fees)
------------------------------------------
$1,400 (total monthly housing costs)
- $350 (monthly recurring debt)
------------------------------------------
$1,750 (total monthly costs)
÷ $4,500 (gross monthly income)
------------------------------------------
= 0. 3888
Multiply that by 100 and you get a TDS of 38.88%
Mortgage lenders generally look for a debt-to-income ratio of 32/40. The first percentage is your GDS ratio, and the second is your TDS ratio. As long as the GDS and TDS figures are below 32 per cent and 40 per cent, respectively, banks and other mortgage companies will generally presume that you can afford to make the repayments.
In our example, Tiffany has a debt-to-income ratio of 31/39. According to most lenders, she would be able to afford a monthly mortgage payment of $1,150.
