Here’s everything you need to know to figure out mortgage payments and loan amounts using my basic mortgage calculator. If you want detailed information on the subjects covered here see the financing section of my blog. Articles on bridge loans, the Region’s Affordable Home Ownership Program, and more can be found there.
If you use my calculator, make sure you enter the right interest rate. It isn’t what your lender is promising. See The Stress Test write up below for more info.
Continue below for an explanation of the GDS and TDS ratios and use the appropriate ratio to figure out how big a monthly payment you are allowed.
Check out the Mortgage Size section below for an explanation of your maximum mortgage loan amount.
The rule for mortgage payment size vs. income uses one of two ratios:
The Gross Debt Service ratio limit is 35% of gross income for property taxes, heating, mortgage payments and ½ condo fees (if applicable).
The Total Debt Service ratio is a maximum of 42% of gross income. It’s used if you have existing debt, which is included in the above calculation.
Here’s a great calculator using the GDS and TDS percentages: CMHC debt service calculator.
Once you know how big a mortgage payment you can carry, use that to calculate the maximum amount you can qualify for.
Your mortgage size is determined by three factors; your mortgage monthly payment, your stress test interest rate, and the amortization period.
Once you know the size of your monthly payment you can use the other two variables to figure out just how much you can borrow.
Your time-frame for repayment and the interest rate make a big difference in the amount you can borrow and how much it will cost you in interest. I explain how these factors work in the video below.
In January of 2018, the federal government brought in new mortgage rules. The most significant of these was the mortgage stress test.
Buyers are required to qualify for their mortgage at a higher interest rate than what they will actually pay when they purchase. This is being done to limit the amount you can borrow relative to income.
The stress test rules have been tweaked a few times. The most recent change came into effect on June 1st, 2021. Your stress test rate will now be 2% above the rate your lender is offering you or 5.25%, whichever is higher.
The rate you’ll actually pay once you buy is the rate you are offered by your lender. Monthly payments and interest will calculated from this lower rate, not the stress test rate.
There are very good reasons for getting a pre-approval. The process shows you exactly where you stand financially. And staying within a budget means you’ll be able to pay off your home in relative comfort.
The approval means a lender has vetted you and is willing to finance your purchase, and this helps out at offer time.
Think about it from the sellers viewpoint; two offers, one pre-approved and one that isn’t. The offers are the exact same otherwise. But it will take the buyer without a pre-approval 3 to 5 days to find out if they can get even get financing. Which one would you take?
If you are serious about purchasing a home, get pre-approved. Rates are usually locked in for 120 days. Put the advantage in your court when making an offer. Know what you can afford and choose accordingly. Be financially smart!
Parisa and Ali