Here’s the simplified version of what a mortgage professional would walk you through.
Step One — Find your gross monthly income
Add up your income from all sources and divide by 12. For example, an annual income of $90,000 works out to $7,500 a month.
Step Two — Apply a target percentage
Lenders generally want your housing costs (mortgage, property tax, heat) to stay under about 39% of your gross monthly income, and your total debt payments (housing plus car loans, credit cards, student loans, etc.) to stay under about 44%. These are called the GDS and TDS ratios, and every lender uses them.
Step Three — Subtract your other debts
Add up your monthly payments on everything else — car loan, credit cards, student loans. Say that comes to $600 a month.
Step Four — See what’s left for housing
Take your target housing budget and subtract your other debt from your total debt budget to see roughly what’s left for a mortgage payment.
Step Five — Here’s the part that trips people up: the stress test
Even if a lender is willing to offer you a certain interest rate, Canadian rules require you to qualify at a higher rate — generally your contract rate plus 2%, or a government-set minimum rate that’s reviewed periodically, whichever is higher — ask your mortgage professional for today’s exact number when you’re ready to shop, since it changes over time. This applies no matter how much you’re putting down. It exists to make sure you could still cover your payments if rates go up after you buy — but it also means the amount you can actually borrow is usually lower than a quick back-of-envelope calculation suggests.
Step Six — Add your down payment
In Canada, the legal minimum down payment is 5% on the first $500,000 of the purchase price and 10% on the portion between $500,000 and $1.5 million. Whatever you have available for a down payment gets added to your mortgage amount to arrive at your purchase price.
Did that feel like a lot of steps?
It is — which is exactly why we recommend getting pre-approved by a mortgage professional rather than doing this math yourself. A pre-approval gives you an exact number, locked in, so you’re not guessing when you find the home you want.
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In fact, for every buyer actively viewing homes right now, there are 5-10 more about to begin their search, or eagerly waiting for the perfect property to come up.
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