Determining Maximum Housing Affordability

 

Before beginning the condo buying process, it’s important to determine how much you are willing to spend, down payment (% or $) and the maximum mortgage you are able to qualify for. When calculating maximum affordability, mortgage brokers / lenders take multiple factors into account, including:

  • Down payment (percentage or expressed in dollars)
  • Debt service ratios – these ratios are typically based off income, monthly homeownership costs (estimated) and current debt commitments (credit cards, line of credit, other obligations)

How Down Payments Impact Condo Affordability

In Canada, the minimum down payment on a home must be at least 5% of your purchase price. Let’s see how your down payment percentage impacts you maximum housing price. If, for example, you put a fixed down payment amount of $20,000, the maximum home you will be able to afford, regardless of credit scores / debt ratios, is ($20,000 / 5%) or $400,000. With recent changes to CMHC, for a purchase price over $500,000, home buyers are required to put a minimum of 5% for the first $500,000 and 10% of any amount over $500,000. For homes over $1,000,000, the minimum down payment required is 20%.

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How Debt Service Ratios Impact Condo Affordability

The Canada Mortgage and Housing Corporation (CMHC) uses debt service ratios to determine affordability. The two most important calculations used to calculate the maximum mortgage the lender can offer are the: gross debt service ratio (GDS) and total debt service ratio (TDS). In combination with your down payment to determine the maximum home price you can afford. In order to qualify for a mortgage, your GDS or TDS must be below 32% and 40% respectively. A home buyer with a GDS greater than 32% may appear financially “stretched” to the lender, making it tougher to meet debt payment obligations.

Debt service ratios are in place to ensure that you’re able to make the minimum monthly payment commitment. Debt service ratios take into account your estimated annual mortgage payment as well as maintenance fees, property taxes and heating costs and divides those over your annual income.

It’s important to realize the difference between down payment and debt service ratios when calculating your maximum home price that you can afford. While putting $20k down (5%), may afford you a maximum home price of $400,000, your GDS and TDS ratio may only lead to a maximum mortgage amount of $300,000. Combining your down payment with your maximum mortgage amount, the maximum home price you could afford would be $320,000.

Calculation for Gross Debt Service Ratio

Gross Debt Service Ratio
=
Mortgage payments + Property taxes + Heating Costs + 50% of condo fees
Annual Income

 

Calculation for Total Debt Service Ratio

Total Debt Service Ratio
=
Housing expenses (per GDS) + Credit card interest + Car payments + Loan expenses
Annual Income

 

How to Increase Your Mortgage Approval Amount

Assuming you had the chance to try out our mortgage affordability calculator, and you’re unable to reach your desired budget, there are several options available to increase your maximum affordability:

  • Increasing your down payment:
    • While sometime difficult and time consuming, it does provide the ability to purchase a more expensive home.
  • Pay down debts:
    • Improving your GDS and/or TDS scores is a more effective way of increase your loan size. By paying off debts with the highest monthly obligations first, it becomes quicker to qualify for your dream home.

 

Case Study on Maximum Housing Affordability

Case Study
$75,000
House Value
$3,600
Annual Property Taxes
$200
Monthly Heating Costs
$300
Monthly Car Payment
$250
Monthly Credit Card Payment
$20,000
Down payment

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

$75,000 monthly income 32%$ your GDS ratio =
$24,000 max spend
$24,000 max spend $3,600 property taxes $2,400 annual heating costs =
$18,000 max mortgage payments
$18,000 max mortgage payments ÷ $12 months in the year =
$1,500 max monthly mortgage payment

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

$75,000 monthly income 40%$ your TDS ratio =
$30,000 max spend
$30,000 max spend $3,600 property taxes $2,400 annual heating costs $3,600 annual car payments $3,000 credit card payments =
$17,400 max mortgage payments
$17,400 max mortgage payments ÷ $12 months in the year =
$1,450 max monthly mortgage payment