How do I calculate affordability for a
mortgage?
Want to know exactly how much mortgage you can afford — without guessing or getting ghosted by lenders?
The fast answer
Mortgage affordability = monthly income x allowed debt ratios − existing debts − housing costs. Do the math and you get a real maximum you can safely borrow.
Step-by-step mortgage affordability calculation
1) Gather numbers
- Gross monthly income (before tax).
- Monthly debts (car, student loans, credit cards).
- Expected down payment.
- Estimated property tax, heating, condo fees, insurance.
- Interest rate and amortization (years).
2) Use debt ratio rules (Canada guidance)
- GDS (Gross Debt Service): target 32–39% of gross income. This covers mortgage principal + interest, property taxes, heating, condo fees.
- TDS (Total Debt Service): target 40–44% of gross income. This covers GDS plus all other monthly debts.
Pick conservative numbers if you want shock-proof affordability (GDS 32%, TDS 40%). Banks may allow higher but stress-test rates.
3) Calculate allowable housing payment
- Allowed GDS payment = Gross monthly income × GDS%. Example: $6,000 × 0.32 = $1,920.
- Subtract property taxes, heating, condo fees to find maximum mortgage P&I (principal & interest).
4) Translate monthly mortgage payment into loan amount
Use the loan payment formula or an online mortgage calculator.
Monthly payment formula (annuity):
M = P * r(1+r)^n / [(1+r)^n − 1]
Where:
- M = monthly payment
- P = loan principal (what you want to solve for)
- r = monthly interest rate (annual rate / 12)
- n = total months (amortization years × 12)
Solve for P when you know M, r, n. Or use a mortgage calculator and enter M, rate, amortization.
Quick example (simple):
- Gross monthly income: $6,000
- GDS cap used: 32% → allowed housing = $1,920
- Property tax + heat + condo: $420
- Max mortgage P&I = $1,920 − $420 = $1,500
- Interest rate 5% fixed, amortization 25 years → $1,500 monthly buys roughly $280,000 principal (use calculator to get exact).
5) Factor down payment
- Purchase price = mortgage principal + down payment. If you have $60,000 down and mortgage allowed $280,000, your price range ≈ $340,000.
6) Add buffers and stress tests
- Add 1–2% to your assumed interest rate when calculating (stress test). That protects against rate hikes.
- Leave a monthly buffer (200–500) for repairs, emergencies, and lifestyle.
7) Get pre-approved
Pre-approval confirms what a lender will actually lend. It checks credit, income documentation, and applies the official stress test.
Why this matters
This method gives clear limits. It stops emotional overbidding. It protects your future cashflow. It keeps offers strong and realistic.
For a precise calculation, local market factors and lender rules matter. I provide fast, accurate affordability checks and pre-approval help for buyers in the Greater Toronto Area.
Contact for a custom affordability plan and pre-approval roadmap: tony@sousasells.ca | 416-477-2620 | https://www.sousasells.ca
