Principal: The amount that you borrow for a loan. Each monthly mortgage payment consists of a portion of the principal that must be repaid plus the interest that the lender is charging you on the outstanding loan balance. During the early years of your mortgage, the interest portion is usually larger than the principal portion.
The first affordability rule is that your monthly housing costs shouldn't be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses — known as P.I.T.H. for short. If applicable, this sum also includes half of monthly condominium fees and the entire annual site lease (in the case of leasehold tenure).
Lenders add up these housing costs to determine what percentage they are of your gross monthly income. This figure is known as your Gross Debt Service (GDS) ratio. Remember, it must be 32% or less.
Jane's gross monthly income is $2,500 and Deepak's is $2,000 for a total of $4,500 per month. They should pay no more than $1,440 ($4,500 x 32%) for their monthly housing expenses (P.I.T.H.).
The second affordability rule is that your entire monthly debt load shouldn't be more than 40% of your gross monthly income. This includes housing costs and other debts, such as car loans and credit card payments. Lenders add up these debts to determine what percentage they are of your gross household monthly income. This figure is your Total Debt Service (TDS) ratio.
Jane and Deepak have a gross monthly income of $4,500. Their total debt load should not exceed $1,800 ($4,500 x 40%). They have a monthly car payment of $400, a student loan of $200 and credit card payments for a total of $750 in non-housing debt payments each month. That means, they would have no more than $1,050 ($1,800 – $750) available for monthly housing payments.
Your Maximum Home Price
The maximum home price that you can afford depends on a number of factors but the most important are your gross household income, your down payment and the mortgage interest rate.
This table gives you an idea of the maximum home price you can afford.
Income, Home Price and Down Payment Guide
Household Income
5% Down Payment
Maximum Home Price
10% Down Payment
Maximum Home Price
25% Down Payment
Maximum Home Price
$25,000
$3,000
$60,000
$6,300
$63,000
$18,900
$75,600
$30,000
$3,900
$78,000
$8,200
$82,000
$24,700
$98,800
$35,000
$4,800
$96,000
$10,100
$101,000
$30,300
$121,200
$40,000
$5,700
$114,000
$12,000
$120,000
$36,000
$144,000
$45,000
$6,600
$132,000
$13,900
$139,000
$41,700
$166,800
$50,000
$7,500
$150,000
$15,800
$158,000
$47,400
$189,600
$60,000
$9,300
$186,000
$19,600
$196,000
$58,800
$235,200
$70,000
$11,050
$221,000
$23,400
$234,000
$70,100
$280,400
$80,000
$12,500
$250,000
$27,200
$272,000
$81,500
$326,000
$90,000
$14,400
$288,000
$31,000
$310,000
$92,800
$371,200
$100,000
$16,275
$325,500
$34,800
$348,000
$104,300
$417,200
Figures are rounded to the nearest $100.
This table assumes a mortgage interest rate of 8%, average tax and heating costs in Canada, and the mortgage an average Canadian would qualify for based on a 32% debt service ratio.
For most people the hardest part of buying a home — especially the first one — is saving the necessary down payment. Many people will not have the traditional 25% of the purchase price to put down. With mortgage loan insurance, you can put as little as 5% down. Mortgage loan insurance protects the lender and, by law, most Canadian lending institutions require it. The way it works is if the borrower defaults (fails to pay) on the mortgage, the lender is paid back by the insurer. The cost for this type of insurance is in the form of a premium and can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.
Principal: The amount that you borrow for a loan. Each monthly mortgage payment consists of a portion of the principal that must be repaid plus the interest that the lender is charging you on the outstanding loan balance. During the early years of your mortgage, the interest portion is usually larger than the principal portion.
Jane's gross monthly income is $2,500 and Deepak's is $2,000 for a total of $4,500 per month. They should pay no more than $1,440 ($4,500 x 32%) for their monthly housing expenses (P.I.T.H.).
Jane and Deepak have a gross monthly income of $4,500. Their total debt load should not exceed $1,800 ($4,500 x 40%). They have a monthly car payment of $400, a student loan of $200 and credit card payments for a total of $750 in non-housing debt payments each month. That means, they would have no more than $1,050 ($1,800 – $750) available for monthly housing payments.
