How To Calculate Your Mortgage Affordability

Whether or not you can afford a home depends on many factors. In this blog, we’re on a mission to show you how much mortgage a typical person can afford. We’ll also show you some common calculations needed to understand your home affordability.

Loan-to-Value (LTV) Ratios Impact Your Qualifying Rate

Many different factors impact your home affordability, such as your credit, the property that is being used as collateral, your income capacity to service the debt, your capital in the form of savings/investments, and most importantly, the conditions. Conditions such as the purpose of the loan and the loan-to-value (LTV) ratio.

Capacity To Service A Mortgage Payment

The most important factor in the qualification process is capacity. 

What does that mean, exactly? 

It means that you, as the borrower, can make your mortgage payments. It is not enough just to pay the mortgage payment. The lender will stress-test that payment at a higher interest rate. 

This test also means determining if you can afford the taxes, monthly heating costs, and half of the condo fees (if applicable). 

Secondly, you should be able to carry these payments alongside other outside debts such as car, credit card, or student loan payments. 

Debt Service Ratios Impact Your Qualifying Mortgage Amount

Capacity is tested with two debt-service ratios: Gross Debt Service (GDS) and Total Debt Service (TDS). 

GDS and TDS are also known as debt-to-income ratios. 

As the names suggest, GDS calculates the household debt carrying capacity against your qualified income, and TDS calculates the total debt carrying capacity against the same income. 

On joint applications, ratios for qualifying are combined debt payments and incomes in the case of multiple borrowers.

GDS Ratio= (Mortgage Payment + Property Taxes + Condo Fees/2 + Hydro) / Income

TDS Ratio = (All debts in GDS calculation + all other debts) / Income

Typically, insured or insurable transactions, where the purchase price or assessed value is under $1 million, and the mortgage amortization is limited to 25 years, will lend up to 39% on GDS and 44% on TDS. 

Some lenders will use different ratios due to their risk appetites.

Uninsured transactions are classified as purchases or renewals where a property is valued at more than $1M, the amortization will be over 25 years, or the transaction is a refinance – where equity is taken out or time is being extended.

In the case of uninsured transactions, lenders will have risk assessment criteria to apply for elevated debt service ratios. 

In these cases, lenders will consider the client’s unique financial situation. Most lenders will have lower debt service ratios when the risk is higher, such as for a refinance or an uninsured transaction, or if one of the borrowers has a lower FICO score than their required minimum.

Insurable means a transaction with back-end portfolio lender-paid insurance for a property with 20% or more equity (renewal) or downpayment (purchase) and a value price valuation of less than $1M.

How to calculate your affordable mortgage payment?

To calculate your affordable mortgage payment, we can use the ratio to figure out your qualifying income and subtract the applicable debt payments. 

For our primary example, we will use an annual income of $100K which would be the joint income of 2 borrowers servicing the mortgage together if they made $50K each annually.

We will use the widely accepted and used debt service ratios of 39% GDS and 44% TDS for our discussion. 

We will consider taxes at 1% of property value to simplify property tax rates across Canada, ranging from 0.27% in Vancouver to 3.27% in Manitoba. 

The municipal property tax rate has a range nationally. However, as two of the biggest markets, Greater Vancouver and Greater Toronto, are well below the national average, we’ll use 1% wherever an average is unavailable. We will simplify the heating (utility) cost for all properties at $100/month. 

We will also assume that the client does not have any outside debts or condo fees, though the easiest way to survey how these items affect your purchasing power is to look at what fraction of your monthly mortgage payment they affect. As you only have 5% to work with on a difference between 39% on GDSR and 44% on TDSR, it is best to think of this as an annual amount. So in the case of the borrower earning $100K, any outside debts cannot exceed an annual payment of $5000 or a monthly payment of $416.

GDS = Income $100,000 x 0.39 GDS / 12 = $3250 monthly 

TDS = Income $100,000 x 0.44 TDS / 12 = $3666 monthly 

That means that a person or family earning a combined income of $100K will be able to service monthly mortgage payments, property taxes and heating (plus ½ of condo fees) up to a maximum of $3250. 

They can carry up to $416 monthly in outside debts, such as car loans, student loans, or up to 3% of the balance of all revolving debts ($416/0.03), meaning up to $13,867 balance on your credit card or lines of credit combined.

➡️ Ready to secure your mortgage? Contact nesto’s mortgage experts today for the best rates. 

This article first appeared on the nesto blog: