Mortgage affordability is a major concern for Canadians, as citizens of the country want to know how much of a loan they can afford and whether their mortgage payment will stretch their budget to a breaking point. We offer the best mortgage affordability calculator in Canada. It enables you to find out quickly how much of a mortgage you can afford, and the information on this page helps you better understand the ins and outs of fitting a mortgage within your budget. Consider this important information, and fill in the calculator to get the answers to all of your questions about mortgage affordability.
How is Mortgage Affordability Calculated?
Your mortgage will likely be your largest regular expense, but it will not be the only expense you must pay each month. You will, of course, still need money for food so that you can to eat. It also costs money to heat and maintain your home. The costs for car insurance, gasoline and so on are also included in your required expenses each month. Even without a mortgage payment, the cost to maintain your standard of living is significant.
When you borrow money to pay for a home, you do not want to stretch yourself so thin that it becomes difficult to satisfy your regular mortgage obligations. Once this occurs, it is much easier to miss a mortgage payment or even default on your loan. Canadian lenders recognize this basic fact, so they take your other expenses and debts into account when they are determining whether you can afford the mortgage you are seeking.
To calculate mortgage affordability and loan eligibility for borrowers, banks and lenders take into account two ratios established by the Canada Mortgage and Housing Corporation (CMHC). These ratios are known as the gross debt service ratio and the total debt service ratio.
The gross debt service ratio is the percentage of your monthly gross income that it takes to pay certain fixed housing costs. The CMHC recommends that borrowers have a gross debt service ratio of no more than 32 percent. This is calculated by adding up your housing costs each month and dividing this total by your gross monthly household income. Housing costs include the principal and interest of your mortgage and the amount of money it takes to pay for home heating. Lenders also factor monthly condo fees into the housing costs of condominium owners in Canada. Should your gross debt service ratio be higher than the recommended level, your chances of getting approved for your mortgage go down dramatically.
The second ratio lenders consider during the loan approval process is the total debt service ratio. This represents the total amount that you spend each month on all of your debt payments, including your mortgage payment, credit card payments, student loan payments, car loan payments, and any other loan payments you must pay every month. Banks use a mortgage affordability calculator similar to the one on this page to calculate your total debt service ratio. Basically, they take the total of your monthly debt payments and divide it by your gross monthly household income. The CMHC recommends that your total debt service ratio never exceed 40 percent of your gross monthly household income, so if a lender finds that you have a total debt service ratio of 41 percent or more, it will be much harder to get the mortgage for which you are applying.
Our Canadian mortgage affordability calculator is designed to help you estimate the maximum mortgage you can comfortably afford. Just enter all of the aforementioned information on your debt load, gross income and housing costs into the calculator, and it will automatically calculate the maximum mortgage you can afford based on a down payment of 5 percent. Remember, of course, that a down payment of less than 20 percent means that you will have to pay mortgage insurance. In any case, the maximum estimated mortgage calculated by our mortgage affordability calculator should give you a good idea of the largest mortgage that lenders will grant you.
Other Costs to Remember When Calculating Loan Affordability
When you are considering the maximum that lenders will allow you to borrow for your mortgage, it is important to remember that there are other expenses associated with your loan. In addition to your down payment, you will also need to have enough money to satisfy your loan’s closing costs. Closing costs include such things as title verification and registration fees, home inspection fees, lawyer fees, and other fees that are paid to properly register your mortgage and determine whether or not the home is a worthy purchase.
Closing costs are typically 1.5–2 percent of your final mortgage loan total. You may meet all of the standards set by the mortgage affordability ratios, but if you do not have money for closing costs, you will be unable to close your loan. As you set aside money for your down payment, therefore, it is good to earmark some funds for your final closing costs. That way, after you estimate your mortgage affordability level, you will be confident that you can actually close your loan.
What About Other Monthly Expenses and My Mortgage?
When calculating mortgage affordability, lenders do not take into account the funds you need to buy groceries, afford an Internet connection, pay for cable and telephone service, maintain your home and car, take care of gifts and entertainment, and so on. However, you cannot forget these costs. Lenders may tell you that a mortgage is affordable, but it is not truly affordable if you do not have enough money left over to cover your other expenses after paying all your debts.
Living by a budget helps you keep your expenses under control and assists you in understanding whether or not a mortgage is truly affordable. Set and live according to a well-thought-out budget for several months so that you know how much money you will need each month above and beyond what it takes to pay your mortgage payment.
Interest Rate Considerations
Finally, you should consider long-term mortgage affordability in relation to the interest you will pay on your loan. The lower your interest rate, the more affordable your loan will be, and the less you will send to the bank in interest payments over time. To save money, get the best mortgage rate possible. Making sure your credit is in order and paying the largest down payment you can afford helps ensure that you will qualify for the lowest interest rate available.
Find Out How Much of a Mortgage You Can Afford
If you want to know how to calculate mortgage affordability in Canada, the answer is simple. Input the required figures in the calculator on this page to determine how much of a mortgage you can afford.