Buying the house of your dreams can turn into a nightmare if you realize you can't afford to make payments on it. While you may have saved up enough to make your down payment, you wonder how you'll keep up with your monthly mortgage payments while covering your living costs with your current total income. That's where Insurdinary comes in.
Before closing on your home, use our mortgage affordability calculator to determine your maximum affordability or the total amount you may borrow from a mortgage provider to plan for future costs. Below, we'll discuss the factors that affect mortgage loans and how the calculator accurately works to relay your maximum affordability. Ready to jump right in to Canada’s most comprehensive mortgage affordability calculator?
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Simply put, mortgage affordability is the amount of money you are able to borrow. This amount is determined based on your current living expenditures, your current debt and of course, your current income. If you have a higher mortgage affordability, you can purchase a more expensive home.
But the term ‘affordability’ doesn’t just relate to the amount you can afford. It’s also related to the cost of living in any given city. If the cost of living is higher, such as in Toronto, Ontario and Vancouver, British Columbia, then your affordability will be lower. If you move to a small rural town, your affordability will likely be higher.
There are, however, other influencing factors that determine mortgage affordability such as car payments, credit card debt and the income and credit rating of the co-applicant.
Why Calculating Mortgage Affordability is Important
Calculating mortgage affordability is important because you need to realistically know how much, in addition to all of your other expenses, of your paycheque can go towards your mortgage payment. It’s not advised to get yourself into a situation where you stop investing in a child's future, saving for a rainy day, or stop putting money towards your retirement. You need funds to live and plan for your future.
How Does Your Down Payment Affect Maximum Mortgage Affordability?
Canada has a down payment rule that correlates with maximum mortgage affordability. The more you pay as a down payment, the wider the house pricing range you can consider when buying a home. For instance:
If you saved $25,000 or less, your minimum down payment costs 5% for a house at or under the half-a-million mark.
If you've saved a slightly larger amount, you can afford anything under $1,000,000, where the first $500,000 of your total amount requires a 5% down payment, and the remaining amount comes with a 10% down payment.
With a $200,000 and up down payment, you can afford a home costing $1,000,000 and up with your 20% down payment. Large down payments of these sorts don't require mortgage default insurance since monthly payments and overall mortgage costs are lower.
The "how much mortgage can I afford" calculator saves you from making these calculations yourself. Simply input your down payment amount and determine your maximum mortgage affordability. However, you'll also need to incorporate additional information that affects your affordability rates, including the following.
How Does Net Income Affect Affordability?
Your gross or total income is the amount you and other household members make from jobs and businesses, rent collection, sales, etc., before paying bills and other debts. After paying for your monthly finances, you have your net income.
These numbers give insurance providers an idea of your stability, which determines whether you'll be consistent with payments or fall behind while barely making enough to get from one month to another.
Gross Debt Service (GDS)
The gross debt service or GDS is one ratio mortgage providers use to compare your cost of living and your gross income. Your cost of living includes housing expenses such as property tax for your new home, heating costs, and condo fees.
According to the Canada Mortgage and Housing Corporation (CMHC), your living costs, including mortgage payments, shouldn't exceed 39% of your annual income. For those with less than perfect credit or an unstable income, that percentage drops to 32%. A mortgage company may refuse to provide loans for higher percentages since higher living costs may indicate unsteady payments.
Total Debt Service (TDS)
Another vital ratio the "how much mortgage can I afford" calculator considers is the total debt service (TDS) ratio. This ratio incorporates car and student loans, credit card payments, and other monthly finances not covered in the GDS. Once you find your total for these other finances, add your GDS number and divide by your gross income to receive your TDS.
While those with a strong credit history have a maximum ratio limit of 44%, others may not qualify for a mortgage loan if their TDS ratio is above 40%, according to the CMHC.
Increasing Your Mortgage Affordability
Now that you understand what numbers the "how much mortgage can I afford" calculator uses to determine your appropriate mortgage loan amount, how can you change those numbers? If your GDS or TDS exceed the above percentages, barring you from receiving a loan, here are a few ways to alter your ratios.
Improving Your Income
Your gross income affects your GDS and TDS since the larger your income, the lower your debt and the better your chances of paying for additional or upcoming finances. If your low income keeps you in debt, consider asking for a raise or switching to a position with a better salary. Consider the average income in Canada when evaluating your finances.
The most convenient way to alter your income is by considering the total income of your household rather than your sole income. If a co-signer, such as a spouse or a parent, adds their total earnings to your mortgage loan application, their number automatically improves your mortgage affordability rate. The co-signer helps you cover mortgage payments if your financial situation changes and you can't afford them.
Paying off or Reducing Debts
It's also best to ask for a mortgage loan when you have minimal debts and expenses. That way, your earnings don't disappear drastically behind multiple costs, leaving you without enough to pay for your mortgage loan.
For instance, if you have outstanding credit card debt or car loans, consider paying off as much as possible without dipping into your house down payment funds. Also, cutting down on unnecessary, miscellaneous items and other treats like restaurant dining and online purchases can keep you from falling deeper into debt. Reducing these charges lowers your TDS ratio, making you more likely to receive a mortgage loan.
Should You Reach Your Maximum Affordability?
Even if you obtain a decent maximum mortgage affordability limit, does that mean you should commit that full amount? Borrowing the maximum amount places home buyers at a greater risk because it leaves them with a higher debt to pay back monthly, forcing them to put less money away to protect them from job termination or interest rate fluctuations.
That's why Canadian residents have started adding another factor into their down payment calculations. Following the Total Debt Service + Savings (TDSS) ratio allows you to put away 10% of your monthly paycheque, unlike the original TDS ratio that doesn't consider savings. Doing so gives you leeway in your budget for unexpected spikes in finances and other emergencies.
Find your TDSS by simply taking your monthly income and multiplying that by 10% to find your monthly savings. Then add that savings to your monthly mortgage and other living costs and divide the total by your gross income. The ratio should fall under 40%, but if yours exceeds this, save for a larger down payment or consider a slightly cheaper house outside pricier markets like Vancouver and Toronto.
You should also consider other expenses in your budgeting, such as transportation costs, groceries, and other daily necessities. Failure to consider all of your daily living costs usually results in an uncomfortable living experience since you'll be able to afford your dream home but not much else.
Find Affordable Mortgage Quotes with Insurdinary
Once you have your down payment price and the home of your dreams in sight, it's time to start comparing mortgage providers for the best rates. Insurdinary connects you to trusted mortgage companies and finds the most up-to-date top rates that best match your search. Shopping for a mortgage is time consuming which is exactly why our platform allows you to compare multiple lenders at once; and the rates are updated daily so that you will always receive the most accurate information.
Fill in your mortgage type, purchase and down payment price, rate type, and your desired Canadian province for our partnering mortgage broker, Homewise, to supply mortgage options. Mortgage providers range from more than 30 desirable Canadian companies like Home Trust, First National, and Canadian Western Bank. Each option lists mortgage percentage rates and monthly costs according to your information.
We at Insurdinary believe your mortgage should be affordable, accessible, and most importantly, realistic to your current financial situation.
