Use this tool to see the most expensive home you could afford. The numbers are based on what banks are typically willing to lend. If you’re buying with a partner, combine your income, expenses and debts.
How we got the numbers
This tool uses something known as the “stress test.” The test is designed to ensure homeowners don’t take on too much debt when signing on to a mortgage. Canada’s Office of the Superintendent of Financial Institutions decides the interest rates used in a stress test. Currently, they’re set at the interest rate the homebuyer was approved for plus two percentage points, or 5.25 per cent, whichever is higher.
Depending on the debt ratios of the homebuyer, lenders might approve or reject a mortgage request. The gross debt ratio (GDS) considers the home purchase’s monthly carrying costs (mortgage, heating, taxes, etc.) divided by the homebuyer’s monthly income. The total debt ratio (TDS) is the same plus any additional monthly debt payments the homebuyer may have (credit cards, student loans and car payments).
According to the Financial Consumer Agency of Canada, mortgage requests are likely to be rejected when the GDS is 32 per cent or more or when the TDS is 40 per cent or more. Different institutions use different thresholds.
If the user does not provide heating costs, the default amount used in the calculations is $175 per month. If the user does not provide a property tax monthly payment, the default amount is 1.5 per cent of the purchase price divided by 12. These assumptions match the ones used by the Royal Bank of Canada in their calculations.
You can find the formulas and calculations used here.
