Knowing what you can afford is the first step to a confident purchase. There are really two answers: what a lender will approve, and what actually feels comfortable for you. They’re often not the same number. Here’s how to find both.
What lenders look at
Lenders consider your income, debts, credit history, down payment and the interest rate. Then they run your numbers through two tests.
Debt service ratios. These compare your monthly costs to your gross (before-tax) income:
| Ratio | What it includes | Insured mortgage limit |
|---|---|---|
| Gross Debt Service (GDS) | Mortgage payment, property tax, heat and half of any strata or condo fees | 39% |
| Total Debt Service (TDS) | Everything in GDS plus car loans, credit cards, student loans, lines of credit and support payments | 44% |
The stress test. Lenders calculate those ratios using a higher rate than you’ll actually pay: either 5.25% or your rate plus 2%, whichever is higher. If your rate is 4.29%, they qualify you at 6.29%. You still pay 4.29%.
A real example
A household earns $120,000 a year ($10,000 a month) and has 20% down. Property tax is $350 a month and heat is $100.
| No other debts | With an $800/month car loan | |
|---|---|---|
| Maximum mortgage | About $525,000 | About $479,000 |
| Maximum home price (20% down) | About $656,000 | About $599,000 |
| Actual payment at 4.29% | About $2,845/month | About $2,596/month |
One car payment reduces this buyer’s budget by about $57,000. That’s why paying down debt before you apply can make such a difference.
With less than 20% down, the mortgage insurance premium is added to your mortgage and counts in these ratios, which lowers the maximum slightly. Your credit, the property and the lender’s own policies also affect the final number.
What you should look at
Your approval is a ceiling, not a target. The lender’s math uses your gross income, but you live on what’s left after taxes, savings and everything else. Before you settle on a price, think about:
- Your other goals: travel, retirement savings, kids, a career change or time off
- The full cost of owning: property taxes, utilities, home insurance, strata or condo fees
- Maintenance: many homeowners budget around 1% of the home’s value per year
- A cushion for the unexpected: a job change, a rate increase at renewal or a surprise repair
- Closing costs: see my guide to closing costs in BC and Alberta
A simple gut check: take your expected monthly housing costs and see if you can comfortably set that amount aside for a few months before you buy. If it feels tight, it will feel tighter once you own.
Ways to increase what you can afford
- Pay down monthly debts, especially car loans and credit card balances
- Increase your down payment to reduce the mortgage and possibly avoid insurance
- Add a co-borrower whose income can be counted
- Consider a home with a legal suite, where rental income can help you qualify. See my guide to using rental income.
- Choose a 30-year amortization if you’re eligible, which lowers the payment but increases total interest
Next steps
When you’re ready to shop, pair this with a pre-approval so your budget is confirmed and your rate is held. If you’d rather start with a conversation, I can work out your exact numbers with you, including how different lenders would treat your income and debts.
Frequently asked questions
How much house can I afford on a $120,000 salary?
With no other debts and 20% down, a household earning $120,000 a year could qualify for a mortgage of about $525,000, or a home of about $656,000, at a 4.29% rate. Debts, property taxes and the down payment amount all change the result.
What debt-to-income ratio do lenders use in Canada?
For insured mortgages, lenders generally allow housing costs up to 39% of gross income and total debts up to 44%. These ratios are calculated at the stress test rate, not your actual rate.
Why is my approval lower than I expected?
Lenders qualify you at the stress test rate, which is at least 2% higher than your actual rate. Monthly debts like car loans also reduce how much you can borrow.
Should I borrow the maximum I’m approved for?
Not necessarily. Your approval is based on gross income and doesn’t account for your savings goals, lifestyle or maintenance costs. Many buyers choose a lower price that leaves room in their budget.
How much should I budget for home maintenance?
Many homeowners budget about 1% of the home’s value each year for maintenance and repairs. Older homes may need more.
Next step
Every situation is a little different. If you’d like to talk through yours, book a consultation or read more about my home purchase mortgage service.
This guide is general information, not financial or legal advice. Rules, programs and rates change, so please confirm current details with me or the official sources linked above.