How Much Mortgage Can I Afford? (Canada)

Gross Debt Service (GDS) measures housing costs against gross income: principal, interest, property taxes, heating, and half of any condo fees. Total Debt Service (TDS) adds every other monthly obligation — car payments, lines of credit, student loans, support payments, and 3% of any credit card balance.

Insured mortgages are generally held to 39% GDS and 44% TDS. Some lenders stretch those limits for strong applicants with high credit scores and large down payments, and alternative lenders go further again at a higher rate. The ratio that binds first is the one that determines your maximum.

Every federally regulated lender must qualify you at the greater of your contract rate plus two percentage points or 5.25%. If you are offered 4.5%, you are tested at 6.5%. The payment used in the ratios is the tested payment, not the one you will actually make.

This is the single biggest reason buyers are surprised by their approval amount. On a household earning $150,000 with no other debt, the difference between qualifying at 4.5% and 6.5% is roughly $130,000 of purchase price.

If the number comes back lower than you hoped, there are usually several ways to move it before you compromise on the property.

• Clear or consolidate consumer debt — every $100 of monthly payment removed frees roughly $18,000 of borrowing room
• Add a co-borrower or a strong co-signer, which brings their income into the ratios
• Increase the down payment — above 20% you avoid default insurance and can use a 30-year amortization
• Stretch the amortization from 25 to 30 years, which lowers the tested payment by about 9%
• Document bonus, commission or self-employment income properly, using a two-year average
• Consider a lower property tax or condo fee building — both count directly against GDS

Affordability rules set a ceiling, not a recommendation. A lender does not know about childcare, RESP contributions, a variable income year, or the maintenance a 60-year-old house will demand. Many buyers deliberately purchase 10-15% below their maximum so a renewal at a higher rate is uncomfortable rather than dangerous.

Closing costs also sit outside the ratios. Budget roughly 1.5% to 4% of the purchase price for land transfer tax, legal fees, title insurance, inspection, appraisal and moving, and keep it separate from the down payment.

GDS measures whether the home itself is affordable. It includes the mortgage payment, property taxes, heating, and 50% of condo or strata fees, divided by your gross (pre-tax) monthly income. Most insured lenders cap GDS at 39%.

TDS measures whether your whole financial picture is affordable. It takes everything in GDS and adds the minimum monthly payments on car loans, credit cards, lines of credit, student loans, and support payments. The usual cap is 44%. Whichever ratio hits its cap first is the one that limits your purchase price — for most buyers with a car payment, that is TDS.

Since 2018, federally regulated lenders must qualify borrowers at a higher rate than the one on the contract. That qualifying rate is the greater of your contract rate plus two percentage points, or 5.25%. If you are offered 4.79%, you must prove you could carry payments at 6.79%.

The practical effect is that your approval is roughly 15–20% smaller than your actual payment would suggest. It also means shopping for a lower contract rate lifts your maximum purchase price, because the qualifying rate moves down with it.

Small changes move the number more than most buyers expect.

• Paying off a car loan — a $500 monthly payment consumes roughly $90,000–$110,000 of purchase power.
• Adding a co-applicant's income, even part-time.
• A longer amortization — 30 years instead of 25 lowers the qualifying payment about 8%.
• A larger down payment, which both reduces the loan and can eliminate the CMHC premium above 20%.
• Documented secondary income — rental suite income, bonuses, or two-year self-employed averages.