Many considerations must be taken into account when figuring out how much you can comfortably afford to spend on a home. Let nesto’s Mortgage Affordability Calculator take care of the hard work for you!
Mortgage Affordability Calculator
What is mortgage affordability?
When searching for a home, one of the first steps to take is figuring out how much mortgage you can afford. This is known as mortgage affordability.
Representing the maximum price you could pay for a house and the corresponding mortgage, mortgage affordability is primarily based on your income, monthly expenses and the expenses associated with owning a home. It’s an essential step in the mortgage process as it provides a clear picture of whether you can comfortably afford your mortgage payments. An assessment of your capacity to afford a house will also help you find the home in the right price range to fit your budget.
The easiest way to determine your capacity to afford a house, and the maximum price for which you qualify, is through nesto’s Mortgage Affordability Calculator.
How to use the mortgage affordability calculator
nesto’s Mortgage Affordability Calculator is a practical and effective tool that provides an analysis of your financial situation. The calculator will prompt you to input the required information and will automatically calculate your affordability after just a few simple steps.
Tip: Gather your financial information and expenses ahead of time to make the Mortgage Affordability Calculator easier to use
To facilitate the process, you’ll want to have all your information ready based on the following:
- Financial information (annual household income, property taxes, heating costs)
- Monthly expenses (groceries, entertainment, debt repayment, transportation, medical)
- Mortgage information (purchase price, down payment, interest rate, term, amortization)
How to estimate affordability
As part of the affordability assessment process, mortgage lenders will take an in-depth look at your overall housing costs as well as any outstanding debt. Housing costs can be extensive and quickly add up – from property taxes and insurance, to heat, hydro and repairs, not to mention the cost of your down payment. In order to determine the amount they’ll lend to you, lenders are required to use calculations known as debt service ratios:
- Gross Debt Service (GDS) ratio. This determines the percentage of your gross annual household income required to own your home. Lenders estimate your annual mortgage payments (principal and interest), property taxes, heating costs and a percentage of condo fees, if applicable
- Total Debt Service (TDS) ratio. This is the percentage of your gross annual household income required to own your home, plus all other debts and loans. The calculation uses your GDS percentage and adds any other monthly payments you have including loans or outstanding credit card debt
It’s important to understand your maximum GDS and TDS limit requirements for mortgage approval. Mortgage default insurance is mandatory on every mortgage with less than a 20% down payment in order to protect lenders in the case that you don’t make your mortgage payments.
To be eligible for Canada Mortgage and Housing Corporation (CMHC) mortgage default insurance coverage after July 1st, 2020, borrows are now required to meet the following criteria:
- Gross Debt Service (GDS) ratio less than 35
- Total Debt Service (TDS) ratio less than 42
- Credit score at least 680
- Must not borrow money for down payment
Private mortgage insurers Genworth Financial and Canada Guaranty didn’t follow suit with CMHC changes, which means it’s easier to quality for their mortgage default insurance offerings. Borrowers must meet these terms:
- Gross Debt Service (GDS) ratio minimum 39
- Total Debt Service (TDS) ratio minimum 44
- Credit score minimum 600
Determining your down payment
The minimum down payment when buying a home in Canada is 5% of the purchase price for a home valued at $500,000 or less and 10% for the portion of the purchase price above $500,000.
But, in order to avoid paying mortgage default insurance premiums, you must have at least a 20% down payment. See: How Much Do You Need for a Down Payment in Canada?
Example: If you’re buying a home for $750,000, your minimum down payment is $25,000 for the first $500,000 (5%) and $25,000 for the remaining $250,000 (10%) = $50,000 minimum down payment
It’s important to note that, in addition to your down payment, you also need to have cash resources on hand to cover extra costs that are required to complete the purchase and close the deal.
Important: In addition to your down payment, you also need to have cash resources on hand to cover extra costs that are required to complete the purchase and close the deal
These costs are not insignificant and need to be factored into your own affordability assessment. In most cases, you’ll be required to provide an upfront cash deposit, which is used to demonstrate to the seller that you’re committed to buying the home. There’s generally no minimum required – the amount is determined by the seller – but a general rule of thumb is at least 5% of the purchase price. The deposit will go towards your down payment.
Closing costs, which cover legal and administrative costs when the transaction closes (eg, lawyer fees, home inspection fees, land transfer tax, title insurance) can also add up. And, of course, you’ll need cash to pay the moving company and be sure to budget accordingly so you can still maintain a cash reserve for a rainy day. See: Closing Costs: What are They and How Much Will You Pay?
How to increase your mortgage affordability
There are a number of ways to increase your mortgage affordability and boost your buying power to ensure you’re viewed as a responsible borrower in the eyes of lenders. Here are some simple steps to take to avoid triggering any red flags:
- Pay off debts. Generally speaking, the more debt you have, the less you’ll be able to borrow
- Curb your spending. Use a budget planner, cut back where you can
- Reduce open accounts. Too many credit cards, a line of credit, or overdraft protection may affect the amount you can borrow
- Ensure your credit score is healthy. The better your credit rating, the more attractive you are to lenders; the minimum requirement is a score of 680
- Consider a lower priced home. A less expensive home means a lower down payment and smaller monthly mortgage payments
- Choose a longer amortization. This will lower your monthly repayments, making them more affordable
How nesto works
We offer all the help of a mortgage broker, without the commission. Simply put, our salaried mortgage advisors are rewarded based on your satisfaction. We’re here to help you reach your goal and guide you through the complicated world of home financing. #yesyoucan #empowermentisthenewsexy
Every mortgage professional knows the market’s best rates every time they check their email. Only a few of them will give you that rate without making you work for it. nesto’s here to change the industry for this very reason. You always get the best rate upfront with nesto.