MORTGAGES & BORROWING: HOW MUCH DO I QUALIFY FOR?

There are many factors to consider when determining your maximum borrowing limit when taking out a mortgage loan. The key is to find an amount that enables installments which are manageable to you, and balancing that with the purchase price point of the home you need. In general, borrowers can typically take on a mortgage that is around 4 times their annual gross income, but every homeowner is different. Here are some of the metrics banks and lenders use to determine your borrowing threshold, and we at Dominion Lending Centres can help you figure it out.

Mortgage Installments

Firstly, it is important to know what exactly makes up your gross income, and how that relates to mortgage payments. Your gross income is the total income paid by your employer before taking deductions such as taxes and pension deductions. The monthly mortgage installment or payment is made up of principal and interest, and banks and lenders often collect property taxes in addition. There are specific debt ratios that banks use to decide if you qualify or not.

Gross Debt Service – GDS Ratio

The GDS ratio is the portion of your monthly income that would be put towards your housing costs, including mortgage payments, property taxes and utilities. Different banks and lenders have different rules on what this ratio can be. Generally, lenders are comfortable with loans which put this ratio at 0.35 or less, but there are exceptions and this ratio can exceed the 0.4 range in some circumstances, which is why you need an expert mortgage broker to help you.

Total Debt Service - TDS Ratio

The TDS ratio determines the portion of your monthly income that is required to service your overall debt. In addition to the housing costs above in the GDS Ratio, the TDS ratio also includes items like child support payments, other loan payments, credit card debt, or any other owed amounts. Typically, lenders are comfortable when this number is 0.42 or less, although this can also be higher depending on the circumstances.

Minimum Down Payment and Default Insurance

In Canada, if you have less than 20% of the purchase price as your downpayment, the mortgage will have to have Default Insurance. There are three providers of default insurance, including CMHC, Genworth, and Canada Guaranty. The cost of this insurance gets added on to your mortgage at the beginning. While you don’t have to pay it up front, it is still a cost you have to pay back, as you pay off the mortgage. The less you put down, the more it costs. For example, putting only 5% down will come with a much higher Default Insurance Premium than putting 15% down.

While these metrics provide general guidelines for loan qualifications, it is important to consider how a loan will impact your lifestyle and the risks which it could pose should your circumstances change. Our mortgage experts can work with you to create the mortgage structure that is right for your needs and your future. Contact us at Dominion Lending Centres today to ensure you make this big step with the right advice.

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