How Mortgage Affordability Is Estimated

Two ratios do most of the work

Lenders assess affordability primarily through two debt service ratios, calculated the way CMHC describes in its GDS and TDS guidance.

• Gross Debt Service (GDS): housing costs as a share of gross income. Housing costs include the mortgage principal and interest, property taxes, heating, and a portion of condo fees where applicable.
• Total Debt Service (TDS): housing costs plus your other monthly debt obligations, as a share of gross income.

The lower of the two capacities governs. If your other debt payments are significant, TDS becomes the binding constraint no matter how comfortable GDS looks.

The qualifying rate

Ratios are not tested at the rate you expect to pay. Uninsured mortgages are assessed against a minimum qualifying rate, described by OSFI in its minimum qualifying rate guidance, which is generally the greater of the contract rate plus two percentage points or a stated floor.

This is why an affordability estimate produces a smaller number than a payment calculator at your quoted rate. The two are answering different questions.

The down payment

Your down payment sets the purchase price alongside the mortgage amount, and it also determines whether default insurance applies. The FCAC's down payment page sets out the minimums, and the purchase and down payment calculator applies them to a specific price.

The payment maths

Canadian fixed-rate mortgages are quoted on a nominal rate compounded semi-annually. To convert to a monthly rate, the semi-annual rate is compounded across the period rather than simply divided by twelve. That effective monthly rate then drives a standard amortized payment calculation. The affordability calculator shows every assumption it uses.

What an estimate cannot tell you

• How your income will be documented and treated, which matters a great deal for self-employed, commissioned and variable income.
• How your credit history will be assessed.
• How the specific property will be viewed.
• Which lender policies apply, since they are not uniform.
• Whether default insurance premiums change the structure.

An estimate frames the conversation. It is not a pre-approval, and it should never be treated as one. The FCAC's guide to preparing for a mortgage covers what typically comes next.

Budget beyond the ratios

Ratios test whether payments can be serviced on paper. They do not test whether the resulting life is comfortable. I encourage clients to look at the estimate and then ask separately what payment they actually want to live with.