This is the big question: how much money do I have to make in order to afford a house in Canada? Well the short answer is that it depends. Vague, I know. The reality is that it depends on multiple factors. In a perfect world, we would all be making enough money where we would not have to worry about whether it is enough to buy a house or not. Especially in the current real estate market, many of us have to consider if we make enough money. Let’s look into what contributes to your mortgage qualification.
Debt-to-Income Ratios
Regardless of how much money you make, it all depends on how much of your income is available and not already dedicated to paying off existing debts. The higher your debt-to-income ratio the higher your risk as a borrower. Debt-to-income ratios are divided into two separate calculations: your Gross Debt Service Ratio (GDSR) and your Total Debt Service Ratio (TDSR). Typical lender requirements require GDSR to be 39% or less and TDSR to be 44% or less.
Gross Debt Service Ratio
Your GDSR calculates the percentage of your annual income that will go toward covering your housing expenses. This includes your mortgage payments (principal and interest), property taxes, and utilities, divided by your gross monthly income.
Gross Debt Service Ratio = Principal + Interest + Taxes + Utilities / Annual Income
Total Debt Service Ratio
Your TDSR calculates the percentage of your gross annual income that covers your debt responsibilities. This includes your loans, expenses, and all other debts.
Total Debt Service Ratio = Debt Obligations + Other Expenses / Annual Income
Down Payment Amount
The money you have saved or been gifted to go towards your down payment contributes to the size of mortgage you’ll need. If you have a lower income that does not qualify you for a large loan amount, the size of your down payment can close the gap between what you can afford and what lenders say you can afford. Think of it this way, the lower your mortgage amount, the less of a risk lenders take on by lending you the money so the more likely you will be approved if you have lower income.
The lower your down payment, the more risk there is to the lender. So, with any down payments below 20% of the property value, lenders require you to have mortgage default insurance. By having at least a 20% down payment, you can avoid the extra costs associated with mortgage default insurance.
Credit Score and Debt History
Again, regardless of how much money you make, lenders want to make sure that you are reliable in paying back your debts. By considering your debt history and credit score, lenders have an insight on how trustworthy you are with your debt responsibilities. Let’s say you make over $100,000/year but you spend your money on silly things and neglect your financial responsibilities, it doesn’t really matter how much money you make because you don’t spend it correctly and lenders will be less likely to lend you money to buy a house.
In general, your credit score should be a MINIMUM of 620 to be seriously considered for a mortgage. If you’re below a 620 credit score, this doesn’t mean you are out of luck - it just means it will be trickier to find a lender that will lend you the money.
Location
Arguably the biggest component that decides how much money you need to make in order to afford a house depends on where you live. Let’s take a look at the average price of a house in these Canadian cities:
Winnipeg – $357,063
Toronto – $1,091,300
Calgary – $518,000
Halifax – $484,000
Kelowna – $1,319,200
With a yearly income of $75k or less, it is unlikely you would be able to qualify for anything above a $400k mortgage. In today’s real estate market and depending on where you live, that may not go very far.
Stress Test
Lenders also require your qualification to pass a stress test. A stress test is an increase of your interest rate by 2% and re-calculates your mortgage amount to confirm it remains under the required debt ratios based on your income and debt responsibilities. So even if your income allows you to qualify for a certain amount, the stress test may reduce that amount significantly.
How Can I Qualify For More?
Having two incomes on a mortgage application does wonders. Although, if you’re a single income household - this makes this significantly harder.
Co-Borrower
By adding a co-borrower to your application, it increases the amount you can qualify for by considering that borrower’s income as well and help decrease your debt to income ratios. Although asking someone to co-borrow with you is not a light favor because if you default on your payments they will be held accountable as well.
Paying Off Debts
Reducing your debts will allow your income to mean more for your mortgage qualification. You will have more of your income available to go toward your mortgage payments and therefore will be able to qualify to borrow more money.
Larger Down Payment
It may take you longer to save up the money, but with a larger down payment you won’t have to borrow as much money from lenders and if you have a single income it makes borrowing money a lot easier.
As much as we wish we could give you an amount of money you need to make in order to buy a house in Canada, the reality is that it depends on several personal financial factors. The best way to get a concrete idea of how much you can afford on your current income is to speak with your mortgage specialist. Here at Venture Mortgages we have a few tricks up our sleeves to help you qualify for more money by considering your specific financial situations. Book a call today!