Understanding What You Can Afford
Figuring out how much house you can actually afford goes way beyond just looking at your income. Lenders evaluate your entire financial picture, and Canadian regulations have specific rules to protect both you and the lender from taking on too much debt.
The two key ratios lenders use are GDS (Gross Debt Service) and TDS (Total Debt Service). Your GDS ratio looks at your housing costs alone - that means mortgage payments, property taxes, heating, and condo fees if applicable. Most lenders want this under 32-39% of your gross monthly income.
Your TDS ratio is the bigger picture. It includes all your housing costs plus car loans, credit cards, student loans, and any other debt payments. Lenders typically want this below 40-44%. If you're carrying significant debt, it directly impacts how much mortgage you qualify for.
The Mortgage Stress Test
Here's something that catches a lot of first-time buyers off guard: you need to qualify at a higher interest rate than you'll actually pay. This is the mortgage stress test, introduced to make sure borrowers can still afford payments if rates increase.
Currently, you need to qualify at either your contract rate plus 2%, or 5.25%, whichever is higher. So if you're getting a 3.5% rate, you'll need to prove you can afford payments at 5.5%. This reduces your borrowing power compared to pre-2018 rules, but it's designed to prevent people from overextending themselves.
The stress test applies to both insured and uninsured mortgages. The only exception is if you're renewing with your current lender - then the stress test doesn't apply. But if you want to switch lenders at renewal, you'll need to pass the test again.
Down Payment Realities
The minimum down payment in Canada depends on your purchase price. For homes up to $500,000, you need at least 5% down. Between $500,000 and $1 million, it's 5% on the first $500K and 10% on anything above that. If you're buying over $1 million, you need 20% minimum - no exceptions.
Getting to that 20% threshold is a game-changer. You avoid CMHC insurance premiums, get access to better rates, and can extend your amortization to 30 years instead of the 25-year maximum for insured mortgages. Plus, you've got more equity from day one, giving you a bigger cushion if property values dip.
Don't forget about closing costs, which typically run 1.5-4% of the purchase price. These include land transfer taxes, legal fees, home inspection, title insurance, and moving costs. First-time buyers often underestimate these and find themselves scrambling at closing.
Beyond the Numbers
Just because you qualify for a certain amount doesn't mean you should borrow that much. Lenders want to maximize their business, but you need to think about your lifestyle and financial goals.
- Emergency Fund: Keep 3-6 months of expenses saved after your down payment
- Maintenance Costs: Budget 1-3% of home value annually for repairs and upkeep
- Property Taxes: Vary widely by municipality - check local rates carefully
- Utilities: Older or larger homes can have surprisingly high heating/cooling bills
- Lifestyle Flexibility: Leave room in your budget for vacations, savings, and unexpected expenses
- Career Stability: Be realistic about job security and income consistency
Frequently Asked Questions
How much income do I need to buy a $500,000 home?
With a 5% down payment ($25,000), you'd typically need a gross household income around $90,000-$100,000, assuming minimal other debts. With 20% down ($100,000), you could qualify with around $75,000-$85,000 income. These are rough estimates - your exact situation depends on debts, credit score, and current interest rates.
Can I use my RRSP for a down payment?
Yes, through the Home Buyers' Plan (HBP). You can withdraw up to $35,000 from your RRSP tax-free ($70,000 for a couple) for your first home. You have 15 years to repay it, starting the second year after withdrawal. If you don't repay on schedule, the missed amount is added to your taxable income.
What if I'm self-employed?
Self-employed borrowers face extra scrutiny. Most lenders want to see two years of tax returns and financial statements. They'll use your net income after business expenses, which can significantly reduce your qualifying amount. Some lenders offer stated-income programs, but expect higher rates. Working with a mortgage broker who specializes in self-employed clients can help.
Does my spouse's income count if they're not on the mortgage?
Adding a spouse or common-law partner to the application can increase your borrowing power, but their debts will also count against you in the TDS calculation. If they have significant debt, it might actually hurt your application. Run the numbers both ways before deciding.
Should I get pre-approved before house hunting?
Absolutely. A pre-approval tells you exactly what you can afford and locks in a rate for 90-120 days, protecting you if rates rise. It also shows sellers you're a serious buyer with financing already lined up. Pre-approvals are free and don't obligate you to that lender - shop around after you find a property.