Mortgage affordability is a topic that has been thrust into the spotlight with the regular Bank of Canada interest rate hikes. You would think that calculating how much of a mortgage you can afford would be straightforward. However, be mindful of websites that make it seem as if your new mortgage is a simple calculation without any other considerations. Thes sites may be misleading or they may provide inaccurate information. Before you sign a mortgage contract with anyone use the impartial Canadian Housing Corporation’s (CMHC) mortgage calculator.
The CMHC is the Crown corporation that is Canada’s national housing agency, so there is no more impartial 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 helpful news article from CTV News will help you to untangle the calculations and decisions you need to make before you take the mortgage plunge:
Step 1: If you don’t already know your monthly mortgage payments, you can calculate them using the CMHC mortgage calculator. You’ll need to enter the home’s purchase price, down payment, amortization period, mortgage interest rate, and payment frequency. If you already know the monthly payments, you can skip this step and go on to the next one.
Step 2: Go to the CMHC debt service calculator, where you’ll have to enter in your annual household income (before taxes), monthly mortgage payment (from step 1), monthly heating expenses, monthly property taxes, and other fees such as condo fees and rental fees and association fees if applicable. This is to calculate what’s known as the Gross Debt Service Ratio (GDS), which can’t exceed 39 per cent.
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.
Step 3: If you don’t get an error message and are within the GSD and TDS limits, then you will most likely be able to afford your mortgage and can proceed with shopping around for mortgage rates.
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!