Canadians have a deep love affair with homeownership. But with rising housing prices, navigating the world of mortgages can feel daunting, especially when rates and home prices are high. The big question: can you truly afford the mortgage you’re looking for?
Here’s a breakdown of key factors impacting mortgage affordability in Canada in 2024:
The Gross Debt Service (GDS) and Total Debt Service (TDS) Ratios: These are the golden rules set by the mortgage default insurers in Canada (CMHC, Genworth, and Sagen). Your GDS, which includes just your housing costs (mortgage principal and interest, property taxes, heating), shouldn’t ideally exceed 39%. The TDS widens the scope, encompassing all of your debts – car loans, credit card payments, etc. on top of the mortgage request– and ideally shouldn’t surpass 44%.
To meet the 39%/44% maximum ratio limits, a minimum credit score of 680 is required. For all other credit scores between 600 – 680, slightly lower ratio maximums are likely to apply.
Interest Rates: Even a small increase in interest rates can significantly impact your monthly mortgage payment. Understanding current interest rate trends and potential future fluctuations is crucial. Throw in the stress test if you’re trying to qualify for a new mortgage, and this can be the difference between being approved, or not.
Down Payment: The size of your down payment directly affects how much you need to borrow and your monthly payments. A higher down payment reduces your loan amount and lowers your mortgage payments. For properties under $500,000, the minimum down payment is 5%, but for pricier homes, it increases. Remember, for down payments of less than 20%, you’ll need mortgage default insurance, adding extra cost. For down payments of greater than 20%, not only are you borrowing more, but you can also increase amortization to 30 years and seek out alternative options through lenders that offer higher affordability (for example, B lenders).
Location: Housing prices vary dramatically across Canada. Affordability will be a bigger challenge in hot markets like Toronto or Vancouver compared to smaller towns. There’s also a new saying going around – ‘Drive till you qualify’. It may not be the most practical mortgage advice, but many Canadians are doing it given their remote work capabilities.
Tips for Increasing Your Mortgage Affordability:
Boost Your Income: Earning more allows you to handle a larger mortgage payment while staying within the GDS and TDS ratios. This could be achieved in many ways (part-time work, increasing hours, seeking out a raise or promotion, adding a co-signer to your mortgage, increasing down payment to take advantage of higher amortization and better lending options, etc.)
Reduce Debt: Pay down existing debts to free up more income for your mortgage. This had direct positive impacts on your debt ratios and in most cases, extra money applied towards paying off debt has more impact than applying that same money towards the down payment.
Save Aggressively: The bigger your down payment, the smaller your mortgage and the more affordable it becomes. Avoiding the default mortgage insurers can increase your affordability by tens, if not hundreds of thousands (circumstantial of course).
Shop Around for Rates: Different lenders offer varying interest rates. Negotiate and find the best deal for your situation. The lower the rate, the lower the stress test – the lower the stress test, the higher your affordability.
Beyond the Numbers:
While affordability is crucial, consider other factors. Factor in potential future expenses like maintenance and property taxes. Be realistic about your lifestyle – will your dream home leave you house-poor with no room for entertainment or savings?
Getting Help:
A mortgage professional, like our team at CMS, can assess your financial situation, recommend suitable mortgage products, and guide you through the pre-approval process. Remember, affordability is about long-term financial stability, not just securing that dream home. By carefully considering these factors, you can make an informed decision and find a home that fits comfortably within your budget. Call us today at (905) 455-5005 or visit our Contact Us page.