Mortgage affordability has been a hot topic in Canada. The real estate market has skyrocketed in recent years. Prices have been easing slightly recently, but affording a mortgage is still a very difficult task for many Canadians.
How much of a mortgage can you afford? To determine this, I suggest going straight to the source: the Canada Mortgage and Housing Corporation (CMHC).
The CMHC is the Crown corporation that is Canada’s national housing agency, so there is no better source for this information. There are a few ways to determine how much mortgage you can afford. Let’s start with the more straightforward method.
This is the best way to figure out how much of a mortgage you can afford, as CMHC is the official source and will have the most up-to-date information.
Then, if applicable, you’ll need to fill out your monthly debt payments for your credit cards, vehicle loan or lease, and loans and lines of credit. This is to calculate your Total Debt Service Ratio (TDS), which can’t exceed 44 per cent.
If you get an error message saying your GDS has exceeded 39 per cent, or your TDS has exceeded 44 per cent, you’ll likely have to reduce the amount of your monthly mortgage payment. The common ways to do that are either by putting down a larger down payment, buying a cheaper home, or reducing your other sources of debt. You can also increase your income, which is usually harder to do!
To figure out how much mortgage you can afford, you can always calculate your GDS and TDS yourself. The formulas aren’t overly complex, but it is a bit of a hassle. Here’s how you calculate it:
(Mortgage payments + property taxes + heating costs + 50 per cent of condo fees)
÷ annual income
= GDS ratio (should be < 39 per cent)
(Housing expenses (use GDS numbers) + credit card interest + car payments + loan expenses)
÷ annual income
= TDS ratio (should be < 44 per cent)
The minimum down payment you’ll need to put is 5 per cent of the purchase price up to $500,000, plus 10 per cent of the cost between $500,000 and $1 million. If you have a house that is over $1 million, you’ll have to put in a 20 per cent down payment.
If your down payment is under 20 per cent of the purchase price, you will need mortgage insurance on your loan, and that will be an additional premium placed on your mortgage. The mortgage insurance is only available for properties where the purchase price is less than $1,000,000.
While the following might not reduce your overall mortgage, it could potentially reduce the payments or mortgage length.
Consider keeping your mortgage below the maximum you can afford. By doing so, you’ll have more options in the future if something goes wrong with your financial situation.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.
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