Can I Afford a Mortgage: Calculate how Much You can Afford
When it comes to getting a mortgage, the first question most people ask is, “how much can I borrow?” followed closely by, “how much can I afford to pay?”. No one wants to make the mistake of biting off more mortgage they can chew! Here are a few indicators to help determine just how much you can afford to pay on your mortgage.
Loan to Value (LTV)
The lender will only allow you to borrow a certain amount of your property value. This is referred to as the Loan to Value or LTV.
LTV (%) = (the amount of mortgage loan) / (the value of the property)
You can borrow up to 80% of your property value (80% LTV) without needing to worry about mortgage default insurance fees or up to 95% with default insurance fees.
If you put less than 20 % down on your mortgage you’ll be required to pay CMHC mortgage loan insurance, the premiums of which are determined based on your LTV.
| TV | Standard Premium | Self-Employed without 3rd PartyIncome Validation |
|---|---|---|
| 65% and less | 0.5% | 0.8% |
| 65.1% to 75% | 0.65% | 1% |
| 75.1% to 80% | 1% | 1.64% |
| 80.1% to 85% | 1.75% | 2.9% |
| 85.1% to 90% | 2% | 4.75% |
| 90.1% to 95% | 2.75% |
For more information, check out the CMHC website.
Total Debt Service (TDS) Number
Your TDS number is the percentage of your gross annual income required to cover payments associated with your new home (i.e. your annual mortgage payments, property taxes and heating expenses), plus costs associated with your other debts, including car loans and credit cards. In other words:
TDS = (Home expenses + Car Loans + Credit Card Debts + Other Loans) / Gross Income
RULE OF THUMB Your total debt service number (TDS) should not exceed 40% and by law cannot be more than 44%.
Gross Debt Service (GDS) Number
Your GDS number is the percentage of gross annual income required to cover payments associated with housing, including mortgage payments, interest, property taxes, and heating. It also includes expenses such as condo fees.
GDS = (Annual Mortgage Payments + Property Taxes + Interest + Condo Fees + Heating) / Gross Annual Income
RULE OF THUMB Your gross debt service number (GDS) should not exceed 32% and by law cannot be more than 39%.
