Saint John Condos, New Brunswick
Mortgage Info
Home Buyer Resources
Demystifying Mortgages - How Much Can You Borrow?
A home is typically the largest purchase you will make in your lifetime, and for most Canadians
this means acquiring a mortgage. The amount of your mortgage will determine the where you can
purchase as well as the size of the home - not to mention the size of your payments. So how do lending institutions decide how large your mortgage loan can be?
Lending institutions (such as banks, credit unions, trust companies and insurance companies) want
to be certain that you are capable of repaying the money you borrow; Thus making the loan application
process thorough. Lenders consider your income, credit history, debt load, employment history and
collateral, including the value of the property you wish to buy.
Although there is some discretion in determining the exact amount, the size of your loan is generally
calculated using set formulas - Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS).
GDS is the percentage of your gross monthly income (before taxes) required to cover monthly payments
on mortgage principal, mortgage interest, property taxes and sometimes heating (often abbreviated
as PITH). Your GDS should not exceed 30% to 32% to be eligible for most mortgages. Because many
people also owe money to other lenders (car loan, student loan, credit cards, etc.), TDS offers a more
accurate estimate of what you can afford. TDS is the percentage of your gross monthly income required
to cover PITH plus any other debts. Your TDS should not exceed 40% of your gross monthly income.
There are many other factors that will impact the final mortgage amount. A poor credit history or a spotty employment record, for example, can disqualify you altogether or significantly alter the total. Keep in
mind that just because a lender is willing to approve a large mortgage it is no guarantee that you can, in
reality, afford the monthly payments.
To truly understand how much you can afford you must examine your other monthly expenses - those not
accounted for in the lender's calculations (such as entertainment, charities, vacations, etc.). Remember that
you will also need a lump sum down payment (at least 25% for conventional mortgages and as little as 5%
for high-ratio mortgages) and money to cover closing costs.