Buying a house is a major financial decision. Before you start looking, you need to know how much you can afford. This helps you avoid debt and stay within a realistic budget. In Canada, lenders use your income, debt, and expenses to determine what you qualify for. This guide explains how to calculate your home-buying budget using clear steps and Canadian mortgage rules.
Step 1: Know Your Gross Income
Gross income is the total amount you earn before taxes and deductions. This includes:
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Salary or wages
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Bonuses or commissions
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Rental income
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Investment income
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Other consistent earnings
Lenders use your gross income to estimate how much you can afford to borrow.
Example:
If you earn $6,000 per month before tax, your gross monthly income is $6,000.
Step 2: Understand Your Debt Ratios
Canadian lenders use two key debt ratios:
1. Gross Debt Service (GDS) Ratio
This ratio shows how much of your income goes to housing costs.
GDS includes:
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Mortgage payment
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Property taxes
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Heating costs
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50% of condo fees (if applicable)
Most lenders want your GDS to be 32% or less of your gross income.
Formula:
GDS = (Housing Costs ÷ Gross Monthly Income) × 100
Example:
If your housing costs are $1,800 per month and your gross income is $6,000:
GDS = (1,800 ÷ 6,000) × 100 = 30%
2. Total Debt Service (TDS) Ratio
This ratio includes housing costs plus other debt payments.
TDS includes:
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Credit card payments
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Car loans
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Student loans
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Personal loans
Most lenders want your TDS to be 40% or less of your gross income.
Formula:
TDS = (Housing Costs + Other Debts ÷ Gross Monthly Income) × 100
Example:
If you have $1,800 in housing costs and $500 in other debt:
TDS = (2,300 ÷ 6,000) × 100 = 38.3%
Step 3: Use a Mortgage Affordability Calculator
Online mortgage calculators help you estimate how much you can afford. Use tools from:
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Canada Mortgage and Housing Corporation (CMHC)
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Bank of Canada
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Major Canadian banks
You input your income, expenses, and debts. The calculator shows your estimated home price and monthly payments.
Step 4: Understand Down Payment Rules
Your down payment is the amount you pay upfront for your home. The rest is covered by your mortgage.
In Canada, the minimum down payment depends on the purchase price:
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5% for homes under $500,000
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5% of the first $500,000 + 10% of the portion above for homes between $500,000 and $999,999
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20% for homes over $1,000,000
Example:
For a $700,000 home:
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5% of $500,000 = $25,000
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10% of $200,000 = $20,000
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Total = $45,000
Step 5: Include Mortgage Insurance if Needed
If your down payment is less than 20%, you must buy mortgage default insurance. This protects the lender in case you stop making payments.
CMHC, Sagen, and Canada Guaranty offer this insurance.
The premium ranges from 2.8% to 4.0% of your mortgage amount. It is added to your mortgage and increases your monthly payment.
Example:
If you borrow $400,000 and your premium is 4%, the added cost is $16,000.
Step 6: Estimate Other Costs
Buying a home includes extra costs beyond the mortgage. Include these in your budget:
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Land transfer tax – Varies by province. Ontario, BC, and Quebec have their own rates.
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Home inspection – Usually $300 to $500.
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Legal fees – Around $1,000 to $2,000.
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Appraisal – Some lenders require this. Cost is around $300 to $500.
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Home insurance – Required before closing.
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Moving costs – Can range from a few hundred to a few thousand dollars.
Set aside 1.5% to 4% of the home price for closing costs.
Step 7: Choose a Mortgage Term and Rate
Mortgage rates affect how much house you can afford. In Canada, you can choose:
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Fixed rate – Your rate stays the same for the term.
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Variable rate – Your rate may change based on market conditions.
Terms usually range from 1 to 5 years.
Shop around to find the lowest rate. Even a small difference can save you thousands.
Example:
A $500,000 mortgage at 4.5% over 25 years costs less than the same loan at 5.0%.
Step 8: Get Pre-Approved
A mortgage pre-approval gives you a clear picture of your budget. It shows how much you can borrow, your interest rate, and estimated payments.
To get pre-approved, provide:
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Proof of income (pay stubs, T4 slips)
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Proof of assets and savings
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Details of debts and monthly payments
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Identification
A pre-approval is free. It does not lock you in, but it helps you stay within your limit.
Step 9: Adjust Your Budget for Comfort
Just because a lender approves you for a certain amount does not mean you should borrow the full amount. Think about your comfort level.
Ask yourself:
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Can I still save money each month?
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Can I handle the mortgage if rates increase?
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What if I face a job change or emergency?
Use a lower limit if it helps you stay financially stable.
Step 10: Review Your Budget Often
Your budget can change if your income, debts, or rates change. Check your finances regularly, especially before house hunting.
Make updates to your:
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Monthly expenses
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Credit report
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Savings goals
Staying current helps you make smart buying decisions.
Final Thoughts
Knowing how much house you can afford keeps you in control. Use your income, debt ratios, and down payment to create a clear budget. Include mortgage insurance, taxes, and other costs to get a full picture.
Get pre-approved. Use reliable calculators. Compare rates from different lenders. Buy within your limit and focus on long-term stability.
This simple plan helps you avoid stress and choose a home that fits your budget. In Canada’s housing market, preparation and clear numbers lead to better decisions.