How is mortgage affordability calculated in Canada?
Canadian lenders determine how much you can borrow using two ratios set by the federal government: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio. GDS measures your housing costs (mortgage payment, property tax, heating, and 50% of condo fees) as a percentage of your gross monthly income. The standard maximum is 39%. TDS adds your other debt payments (car loans, credit cards, student loans) to those housing costs. The standard maximum is 44%.
On top of the ratio limits, all borrowers must pass the mortgage stress test introduced under OSFI's B-20 guidelines. The stress test qualifying rate is the higher of your contract rate plus 2% or a floor rate of 5.25%. This means that even if your actual rate is 4.5%, you must prove you can afford payments at 6.5%. The stress test reduces the maximum mortgage you qualify for by roughly 20% compared to qualifying at the contract rate alone.
Canadian mortgages compound semi-annually, not monthly like American mortgages. This means the effective monthly rate is slightly lower than simply dividing the annual rate by 12. The formula converts the stated annual rate to an effective monthly rate using: monthly rate = (1 + annual rate / 2)^(1/6) - 1. Our calculator applies this Canadian compounding method automatically.
What are the down payment rules in Canada?
Canada has tiered minimum down payment requirements based on purchase price. For homes up to $500,000, the minimum is 5% of the purchase price. For the portion between $500,001 and $1,499,999, the minimum is 10%. For homes at $1,500,000 or above, a full 20% down payment is required because CMHC mortgage insurance is not available at that price point.
A larger down payment directly increases how much home you can afford. With less than 20% down, your mortgage is considered high-ratio and requires CMHC mortgage insurance, which adds a premium of 0.60% to 4.00% of the mortgage amount to your loan balance. With 20% or more down, you avoid insurance entirely and can access amortization periods up to 30 years instead of the 25-year maximum for insured mortgages.
| Purchase Price Range | Minimum Down Payment |
|---|---|
| $0 to $500,000 | 5% of purchase price |
| $500,001 to $1,499,999 | 5% on first $500K + 10% on remainder |
| $1,500,000 and above | 20% of purchase price |
How does CMHC mortgage insurance affect affordability?
When your down payment is less than 20% of the purchase price, you must purchase mortgage default insurance from CMHC, Sagen, or Canada Guaranty. The insurance premium is calculated as a percentage of your mortgage amount and is added directly to your loan balance, increasing both your total mortgage and your monthly payments.
The premium rate depends on your loan-to-value (LTV) ratio. A higher down payment means a lower LTV and a lower insurance premium. For example, on a $400,000 home with 5% down ($20,000), the mortgage is $380,000 and the CMHC premium is 4.00%, adding $15,200 to the loan. With 10% down ($40,000), the premium drops to 3.10%, adding $11,160. With 15% down, it drops further to 2.80%.
| Loan-to-Value Ratio | CMHC Premium Rate |
|---|---|
| Up to 65% | 0.60% |
| 65.01% to 75% | 1.70% |
| 75.01% to 80% | 2.40% |
| 80.01% to 85% | 2.80% |
| 85.01% to 90% | 3.10% |
| 90.01% to 95% | 4.00% |
What is the mortgage stress test and how does it work?
The mortgage stress test is a federal requirement that ensures borrowers can afford their mortgage if interest rates rise. Under OSFI's B-20 guidelines, lenders must qualify you at the higher of your contract rate plus 2 percentage points or a floor rate of 5.25%. This qualifying rate is used to calculate your GDS and TDS ratios, even though your actual payments are based on the lower contract rate.
For example, if your lender offers you a rate of 4.5%, the stress test qualifying rate is 6.5% (4.5% + 2% = 6.5%, which is higher than the 5.25% floor). Your maximum mortgage is determined using the 6.5% rate, but your actual monthly payment is calculated at 4.5%. This gap between qualifying rate and payment rate is the stress test buffer that protects you against future rate increases.
The stress test applies to all mortgages at federally regulated lenders, including new purchases, renewals with a new lender, and refinances. It does not apply when renewing with your existing lender at a standard posted rate.
Worked example: how much can you afford on $100,000 income?
Consider a household earning $100,000 annually with $50,000 saved for a down payment, a 4.5% mortgage rate, 25-year amortization, $300/month property tax, $150/month heating, no condo fees, and no other debts.
Monthly gross income is $8,333. The stress test rate is 6.5% (4.5% + 2%). Using the GDS limit of 39%, the maximum housing costs are $3,250/month. After subtracting property tax ($300) and heating ($150), the maximum monthly mortgage payment at the stress test rate is $2,800. Converting this to a principal amount using Canadian semi-annual compounding at 6.5% over 25 years gives a maximum mortgage of approximately $403,000.
Adding the $50,000 down payment, the maximum purchase price is roughly $453,000. With a down payment of about 11%, CMHC insurance at 3.10% adds approximately $12,500 to the mortgage. The actual monthly payment at the 4.5% contract rate (not the stress test rate) is approximately $2,300, which is well within the household's budget.
If the same household had $500/month in car loan payments, the TDS constraint would become binding. Max housing costs under TDS (44%) are $3,667, minus $500 for the car loan leaves $3,167 for housing, minus tax and heating leaves $2,717 for the mortgage. This reduces the maximum mortgage to roughly $391,000 and the purchase price to about $441,000.
What does it mean to prequalify for a mortgage?
Prequalification gives you an estimate of how much a lender might approve based on self-reported income, debts, and credit information. It is not a commitment from the lender and does not involve a credit check. Prequalification helps you set a realistic budget before house hunting so you do not waste time looking at homes outside your price range.
Pre-approval is the next step. A lender reviews your actual financial documents (pay stubs, tax returns, bank statements, credit report) and issues a conditional commitment for a specific mortgage amount at a locked-in rate, typically valid for 90 to 120 days. Pre-approval carries more weight with sellers because it shows you have been vetted by a lender.
This calculator functions as a prequalification tool. It applies the same GDS/TDS ratios and stress test that lenders use, giving you a realistic estimate before you speak with a mortgage broker or bank.
Frequently asked questions
How much mortgage can I qualify for on $100,000 salary in Canada?
On a $100,000 salary with a $50,000 down payment, 4.5% rate, 25-year amortization, and no other debts, you can qualify for a mortgage of approximately $403,000 and a maximum purchase price of around $453,000. Add existing debt payments and the amount decreases. Use the calculator above to model your exact scenario.
What is a good GDS and TDS ratio for a mortgage?
The maximum GDS ratio is 39% and the maximum TDS ratio is 44% at most lenders. Lower is better. A GDS under 32% and TDS under 40% gives you a stronger application and more financial breathing room after closing. If you are applying for CMHC-insured mortgage and your credit score is below 680, some insurers apply stricter limits of 32% GDS and 40% TDS.
Does the stress test apply to all mortgages in Canada?
The stress test applies to all new mortgages, refinances, and transfers to a new lender at federally regulated institutions. It does not apply when you renew with your current lender at a standard posted rate. The qualifying rate is the higher of your contract rate plus 2% or 5.25%.
How much down payment do I need for a $500,000 house?
For a $500,000 purchase price, the minimum down payment is 5%, which is $25,000. You would need CMHC mortgage insurance (4.00% premium on the $475,000 mortgage, adding $19,000). With 20% down ($100,000), you avoid insurance entirely and can access 30-year amortization.
Can I get a 30-year amortization on a mortgage in Canada?
A 30-year amortization is available only on uninsured mortgages (20% or more down payment). CMHC-insured mortgages are limited to 25-year amortization. In late 2024, the federal government allowed 30-year amortization for first-time homebuyers purchasing newly built homes with less than 20% down, but this is a targeted exception.
What is the difference between prequalification and pre-approval?
Prequalification is an estimate based on self-reported information with no credit check. Pre-approval involves a full document review and credit check, and the lender issues a conditional commitment at a locked-in rate for 90 to 120 days. Pre-approval is stronger when making an offer because it shows the seller you have been vetted.
How does CMHC insurance affect my monthly payment?
CMHC insurance premiums are added to your mortgage balance, increasing both the total amount borrowed and your monthly payment. On a $400,000 mortgage with 5% down, the 4.00% premium adds $15,200 to the loan. At 4.5% over 25 years, this adds roughly $85 to your monthly payment.
Why do Canadian mortgages use semi-annual compounding?
Canadian law (Interest Act) requires mortgage interest to be calculated using semi-annual compounding, not monthly compounding as in the United States. This means interest compounds twice per year rather than twelve times, resulting in a slightly lower effective rate. A stated 5% rate in Canada produces lower payments than a stated 5% rate in the US because of this compounding difference.
What monthly costs does the GDS ratio include?
GDS includes your monthly mortgage payment (principal and interest), property taxes, heating costs, and 50% of condo or strata fees. It does not include utilities other than heating, home insurance, or maintenance costs. The sum of these costs divided by your gross monthly income must stay at or below 39%.
How do other debts affect how much mortgage I qualify for?
Other debts reduce your mortgage qualification through the TDS ratio. Every dollar of monthly debt payment (car loans, student loans, credit card minimums, lines of credit) reduces the amount available for mortgage payments. For example, $500/month in car payments on a $100,000 income reduces your maximum mortgage by roughly $12,000 compared to having no other debts.