How much mortgage can I afford?

You have the dream. You've done a little research. But now it's time to talk money. Can you afford a mortgage? Here are a few things to consider.

Calculate your annual household income

The annual household income is the total amount of money a household earns before taxes and deductions. Lenders consider contributing income earners as co-applicants and co-borrowers on a mortgage. 

Some people living under the same roof combine incomes to pay bills. This makes affording a mortgage easier. But could you still afford your mortgage if you lost one income source? Consider extra income. Will someone else help pay the housing costs today or in the future? Review all factors, like total housing costs and outstanding debt, before you decide.

Also, keep a record of any overtime or bonuses for future reference. Lenders don’t usually include overtime or bonuses in their final equation. If your income fluctuates, keep a record of your notice of assessments. A lender compares your pay stubs and electronic funds transfers to these assessments.

Review your finances

Lenders look at housing costs and outstanding debt to determine if you can afford a mortgage. So, review these costs before applying for pre-approval. Here's how.

Estimate housing costs

Buying a home means extra expenses: property taxes, housing insurance, possibly mortgage insurance, heat, hydro and the list goes on. You also pay for household repairs and ongoing maintenance. Not to mention, your housing costs increase if you have one or more dependents living at home.

Include taxes and insurance

Property taxes and homeowners insurance are necessary when buying a new home. You need to have home insurance with the lender named on the policy. Also, the government requires all homeowners to pay property taxes. These costs are often overlooked but should be considered before applying for a mortgage.

Determine total debt

Outstanding debt affects your ability to make regular mortgage payments. Too much debt, particularly big balances on credit cards, is a red flag to lenders.

A mortgage is another debt you need to pay off. If you can, pay off most of your outstanding debt before taking on another loan. And pay it off quickly. It might improve your chances of getting pre-approved for a mortgage.

If you don't have much disposable income every month, rethink your home buying strategy. Consider lower-priced homes. Reduce personal spending. Pay off debt. Give yourself some room so you're not strapped for cash. You want to enjoy your new home, not live in a financial prison.

Manage your debt with these 2 tips.

• Collect past and present bank statements. Crunch the numbers and total your monthly debt repayments as one amount.
• Get a credit report. Contact a credit reporting bureau, like Equifax or TransUnion, for a free copy of your credit report. The lender also gets your report, which differs from your copy. Lenders use this report, among other details, to decide whether to accept or deny a mortgage application.

Learn how to get your credit score instantly on the CIBC Mobile Banking^® App.

Understand debt service ratios

Lenders and mortgage insurers use 2 calculations to determine if you qualify for a mortgage. They use gross debt service ratioOpens in a popup. to determine the percentage of your gross annual household income required to cover your mortgage expenses, including principal, interest, property taxes and heating costs. They use total debt service ratioOpens in a popup. to determine the percentage of your gross annual household income required to cover your mortgage costs, plus all other debts and loans.

Calculate your down payment

The size of the down payment affects the size of your mortgage and monthly payments. A smaller down payment — less than 20% of the property value — requires that you purchase mortgage default insuranceOpens in a popup..

A larger down payment means your mortgage will be smaller. Mortgages for less than 80% of the property value usually don't require mortgage insurance. Plus, your monthly payments are smaller.

Look for special incentive programs to boost your down payment.

Examples of programs to help save for your down payment:

• The Home Buyers’ Plan (HBP) Opens in a dialog. lets eligible individuals such as first-time home buyers and their spouse or common-law partner withdraw up to $60,000 each from their RRSPs to buy, build or maintain a home.
• The First Home Savings Account (FHSA) allows homebuyers to save up to $40,000 (plus growth) towards their eligible first home purchase, tax-free.

Don't forget closing costs

Like legal fees and title insurance, closing costs help determine how much down payment you can afford. Factor these into your down payment equation.

Consider your amortization period

If you're trying to keep your mortgage payments low to comfortably fit your budget, you may want a longer amortization period⁵. But if you're comfortable with a larger mortgage payment to save interest, consider a shorter one.

You know the facts, now...

Find out how much you can afford with our mortgage affordability calculator.