How Much House Can I Afford?
Capital-B Insights | December 15, 2024
Written by Miguel Laursen
House-Hunting in 2025
Buying a home is an exciting milestone, but it requires careful planning to ensure you can comfortably afford your new lifestyle as a homeowner. One of the most important steps in your home-buying journey is answering the question: “How much house can I afford?”
Here’s a clear, straightforward guide to help you understand the key factors lenders consider and how you can prepare for homeownership.
Key Highlights
- Lenders assess your ability to afford a home by looking at your debt and income using specific affordability ratios.
- Your credit score significantly impacts the interest rates you’ll pay on your mortgage.
- Don’t forget to budget for closing costs, which can add up to 5% of the home’s purchase price.
Understanding Debt Service Ratios
When determining how much you can afford, lenders use two critical calculations called debt service ratios:
- Gross Debt Service (GDS) Ratio:
- This calculates the percentage of your household income needed to cover housing expenses such as mortgage payments (principal and interest), property taxes, heating costs, and a portion of condo fees (if applicable).
- Total Debt Service (TDS) Ratio:
- This takes GDS further by including all your monthly debt obligations—like credit card payments, car loans, and other lines of credit.
Tip: Use a Mortgage Affordability Calculator to estimate your GDS and TDS ratios and find out what you can afford.
Credit Score: Why It Matters
Your credit score isn’t just a number—it’s a key factor in determining the interest rate on your mortgage. A higher score means lower rates and more borrowing power.
Here’s how to boost and maintain a healthy credit score:
- Pay Down Credit Cards: Keep balances below 70% of your credit limit to avoid negative impacts on your score.
- Maintain Credit History: Keep older credit accounts active, as they demonstrate long-term reliability.
- Correct Errors: Regularly check your credit report with Equifax or TransUnion for errors and address any inaccuracies quickly.
Proactive credit management will help secure the best possible mortgage terms when the time comes.
Saving for a Down Payment
Saving for your down payment takes time, but it’s a worthwhile investment in your financial future. In Canada, the minimum down payment depends on the home’s purchase price:
- 5% for homes up to $500,000
- 10% for the portion above $500,000
- 20% or more to avoid mortgage default insurance
A larger down payment reduces your monthly mortgage costs, shortens your loan term, and lowers the interest paid over time.
Tip: If you’re a first-time homebuyer, you may qualify for the RRSP Home Buyers’ Plan (HBP), which allows you to withdraw funds from your RRSP—tax-free—to boost your down payment, provided you meet the eligibility requirements.
What Is Mortgage Default Insurance?
If your down payment is less than 20%, lenders require mortgage default insurance. This insurance protects the lender in case you can’t make your payments.
Here’s how the cost is calculated:
- It ranges from 2.8% to 4% of your mortgage amount, depending on the size of your down payment.
- Providers include CMHC (Canada Mortgage and Housing Corporation), Sagen, and Canada Guaranty.
Mortgage insurance allows you to buy with as little as 5% down, but if you can save more, you’ll save significantly in the long run.
Don’t Overlook Closing Costs
Closing costs can range from 3-5% of the home’s purchase price and are essential to budget for upfront. These costs include:
- Legal fees
- Land transfer taxes
- Home inspection and appraisal fees
- Title insurance
To be safe, set aside at least 5% of your home’s purchase price for these expenses. Any leftover funds can be used for moving, furnishing, or future home maintenance.
Breaking Down Your Mortgage Payment
Your mortgage payment consists of two main parts:
- Principal: The amount borrowed to purchase the home.
- Interest: The cost of borrowing that money.
In the early years of your mortgage, more of your payment goes toward interest. Over time, as the balance decreases, a greater portion applies to the principal.
Here are the four key factors affecting your monthly payment:
- Loan Amount: The size of your mortgage (home price minus down payment).
- Amortization Period: Longer terms lower your monthly payments but increase total interest. Shorter terms save on interest but require higher payments.
- Payment Frequency: Making payments weekly or bi-weekly can reduce interest costs over time compared to monthly payments.
- Interest Rate: Fixed rates offer stability, while variable rates can fluctuate depending on market conditions.
Use Capital-B’s Mortgage Payment Calculator to explore different scenarios and find the right balance for your budget.
Final Thoughts
Buying a home is about finding the right balance between your dreams and financial stability. By understanding your affordability limits, maintaining a healthy credit score, and preparing for all the associated costs, you’ll be well-equipped to make a wise investment.
At Capital-B, we’re here to guide you through every step of the process—from saving for a down payment to understanding mortgage options. Let’s work together to navigate your investment with confidence.
Frequently Asked Questions
How much of my income should I spend on a home?
Lenders typically recommend spending no more than 35% of your gross household income on housing costs (Gross Debt Service ratio) and no more than 42% on total debts, including housing and other loans (Total Debt Service ratio). These guidelines ensure you can comfortably manage your mortgage alongside other financial responsibilities.
What credit score do I need to buy a house in Canada?
Most lenders look for a credit score of 650 or higher, though some may approve lower scores with conditions. A higher score can secure better mortgage rates, so it’s worth improving your credit before applying.
How much should I save for a down payment?
The minimum down payment in Canada is:
- 5% for homes up to $500,000
- 10% for the portion of the home price above $500,000
- 20% to avoid mortgage default insurance
Saving more than the minimum reduces your monthly payments and overall interest costs.
What are closing costs, and how much will they be?
Closing costs include legal fees, land transfer taxes, home inspections, and more. They typically range from 3% to 5% of the home’s purchase price. Budget for at least 5% to ensure you’re prepared.
Should I choose a fixed or variable mortgage rate?
A fixed-rate mortgage offers stable payments, making it ideal if you value predictability. A variable-rate mortgage can provide lower initial rates, but payments may fluctuate as interest rates change. The choice depends on your financial situation and risk tolerance.
Can I afford a home if I have other debts?
Yes, but lenders will assess your Total Debt Service (TDS) ratio, which accounts for your mortgage and other monthly debt obligations. To improve your chances, aim to pay down high-interest debt and maintain a healthy credit score before applying for a mortgage.
Ready to take the next step?
Contact a Capital-B at 438.802.5000 or Contact Us advisor today for expert, personalized guidance on your home-buying journey.
