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When considering buying a home in Ontario, one of the first questions you might ask is, "How much mortgage can I afford?" This crucial question not only defines your budget but also influences your entire home-buying process. This article will provide you with a comprehensive breakdown of what you need to know.

TL;DR - In Ontario, your mortgage approval depends on a number of factors and ratios between income and expenses, but you can get a rough estimate by taking your total household gross income and multiplying by 4 to get the conservative maximum amount of mortgage that you will likely be approved for. Add your down payment on top of that to get your house price.

Note that even for an extremely rough estimate like the one above, many factors impact your approval, and you should never assume or budget based on this rule. This is for education purposes only, and for those that don’t want to read the whole article!

There are many affordability calculators available online including here at WealthTrack, but for the best information always consult your mortgage broker or lender.

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How Do They Calculate How Much Mortgage I Can Afford?

For this article, let’s interpret “how much can I afford” to mean “how much would I get approved for”. There are significant differences between the two, but since affordability is much more personal and depends on even more factors, let’s set that aside for now.

Debt Ratios

Affordability for a mortgage is primarily based on two ratios between income and expenses. These ratios are called GDS (Gross Debt Servicing) and TDS (Total Debt Servicing).

• GDS measures the ratio between the main mortgage expenses including mortgage payment (principal and interest), property taxes, and heating costs. You may see these referred to as PITH on some websites. For a mortgage with less than 20% down payment, the maximum GDS is currently 39% in order to qualify for the required mortgage default insurance. Once you have more than 20% down there is more flexibility on this ratio because the insurance is no longer required, and 39% is a requirement of the insurers. Note that if your GDS is higher than 39% you will have fewer lenders to choose from and probably pay a higher rate (but not always). Note that condo fees are also included in GDS, usually at 50% of your actual condo fees.

• TDS measures the ratio between all your debts including the GDS expense amounts and also adding on things like credit card payments, student loan payments, car payments, and other loans. Naturally, since there are more expenses included in TDS, this ratio is usually higher than GDS. In our scenario with less than 20% down payment, the maximum TDS allowed to qualify for mortgage default insurance is currently 44%. As with GDS, once you get more than a 20% down payment there is more flexibility here, but the higher you go, the more you will likely restrict the lenders that will offer a mortgage and you will likely face a higher rate. TDS does not include things like your Netflix subscription or other discretionary spending like gas or cable.

To sum it up, your PITH (plus condo fees) can’t be more than 39% of your monthly income, and your total monthly debts including the PITH, condo fees cannot exceed 45% of your monthly income.

Credit Scores

Aside from debt servicing ratios (GDS and TDS), your credit score has an impact on your approval amount. Borrowers who have weaker credit scores will get even less flexibility on the debt servicing ratios. Imagine a below-average credit score will reduce the maximum GDS and TDS, which means that a borrower with lower credit scores will need to have a higher income to afford the same house as a borrower with a strong credit score.

Mortgage Affordability Scenario

Amy and Chris are married with no kids. Amy makes $82,000 per year and Chris makes $40,000 per year at their jobs. They share a car with a monthly payment of $500 and they spend $75 each per month on cell phones. Their credit card bill is $200/month. They want to buy a freehold townhouse but aren’t sure about how much mortgage they can afford. They are thinking about a monthly mortgage payment of $2000 and estimate heating costs at $100/month. Let’s estimate property tax at $3000 per year ($250/month)

Using this scenario, we’d calculate GDS by adding up:

Mortgage Payment: $2000 (principal and interest)
Property Taxes: $250
Heating Costs: $100
Condo Fees: $0
Total: $2,350/month
Monthly Income: $122,000 / 12 = $10,166
GDS: $2,350/$10,166 = 23%

In this case, their GDS is well below the maximum of 39%. It is likely that they could get approved for this house and probably a larger mortgage.

TDS calculates the same way, but using all the other expenses we noted above.

One important thing to be aware of: condo fees can drive up your GDS and TDS, big time.

Imagine we re-run this scenario but we include a $500 condo fee.

Mortgage Payment: $2000 (principal and interest)
Property Taxes: $250
Heating Costs: $100
Condo Fees: $500
Total: $2,850/month
Monthly Income: $122,000 / 12 = $10,166
GDS: $2,850/$10,166 = 28%

With a $500/month condo fee, GDS goes from 23% to 28%. Or think of it this way, for every $140 of condo fees, your mortgage approval drops by $25,000.

Imagine you are looking at two potential places. One has no condo fee but is $500,000 and the other costs $425,000 but has a $570 condo fee. Believe it or not, it is harder to get approved for the $425,000 condo than the $500,000 condo in this case because the condo fee eats up your income just like mortgage payments.

How Can I Get Approved for a Bigger Mortgage?

The best way to be able to afford a bigger mortgage is by raising your income or lowering your debts and working to improve and keep a good credit score.

Some of my clients find they can get quick results by doing one or more of the following tips to raise your mortgage approval:

• Choose a freehold townhouse, semi-detached, or any property that has zero condo fees

• Consider using some of your down payment money to pay off high-interest debt like credit cards. In some cases, eliminating a high-interest debt can improve your mortgage approval amount even with a slightly smaller down payment

• Reduce your non-household expenses by paying off your car or going with one car instead of two (work from home if you can) or reduce your cell phone features or upgrade less frequently to keep your bill down.

• Look for houses in areas where property taxes are lower. Your realtor can help you look up property taxes for houses that are for sale.

As always, every person’s situation is a little different, and so the information here is for educational purposes only. If you want to get advice about your mortgage or want help to secure the best possible mortgage for your unique situation, set up a quick call with us today.

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