Mortgage affordability and down payment

• How lenders determine your mortgage amount
• How to understand debt service ratios
• How to determine your down payment amount

Daydreaming about buying your first home? If you’ve been busy browsing real estate websites and keeping a keen eye on what homes are selling for in your desired area – it might be time for you to take the next step in your search.

When you take the time to find out what you could potentially afford, those daydreams start to feel a little more real. Making that important purchase happen becomes easier once you know what your down payment could be, and what your payments may look like.

So, let’s get started and see your mortgage affordability or how much mortgage you can afford.

How do lenders determine your mortgage amount?

When determining how much mortgage you can afford, lenders take into account a few different factors that we’ll dive into below.

Household income

Lenders will take a look at your income before tax. This may include bonuses and any supplementary income you may have, such as part-time income and commissions. If you have a co-applicant, this will also include their income.

Monthly debt

This is the amount you pay towards any existing debt you may have each month. This can include vehicle loans/leases, personal loans, lines of credit, and credit cards. If you have a co-applicant, this will also include their monthly debt payments.

Down payment amount

This is the amount of money you pay up front to get a mortgage.

You can check out our affordability calculator to help determine your maximum purchase price based on your income and expenses and it can help you see how your down payment plays into the bigger picture.

Property value

This is the dollar amount your home is worth, as determined by the market at the time.

Once you’ve provided the information above or entered it into our affordability calculator, you’ll be able to get a better sense of how large of a mortgage you could afford.

Understanding debt service ratios

Lenders use two different calculations to determine if you could qualify for a mortgage. They use gross debt service (GDS) ratio to determine the percentage of your gross household income needed to cover basic housing expenses. These expenses include the mortgage principal and interest payment, property taxes, heating costs and maintenance fees, if applicable.

Keep in mind the mortgage principal and interest is calculated at the mortgage qualifying rate, and not the rate you’ve received on your mortgage. This is called the stress test, introduced by the Office of the Superintendent of Financial Institutions (OSFI), to mitigate mortgage default risk.

Financial institutions use the stress test to make sure borrowers are able to pay back their mortgage if mortgage rates rise during their mortgage term and checks their ability to make payments based on the Bank of Canada’s qualifying rate.

Next, lenders use the total debt service (TDS) ratio. The total debt service ratio differs from the gross service ratio because it will include any and all debt and isn’t just focused on the housing part of the equation. The TDS ratio is the income required to cover the expenses in the gross service ratio, plus any debts including credit card payments, car loans, student loans, lines of credit, and the expenses for any other properties you may own.

Ultimately, both the gross and total debt service ratios are used by lenders to determine if your income is able to offset the expenses of purchasing a home.

How to determine your down payment

The size of your down payment greatly affects what you can afford, as well as your monthly payments. A smaller down payment (less than 20% of the property value) will also require you to purchase mortgage default insurance.

Having a larger down payment is beneficial in many ways. It means you’ll have a smaller mortgage and that your monthly payments will also be less.

To calculate your down payment amount, you’ll want to take a close look at your finances and determine what you can comfortably afford to spend as the up front cost of your home. There are programs available to help boost your down payment amount before purchase. Learn about the different programs available to you.

Keep closing costs in mind

Be sure to factor in costs like legal fees, title insurance, and land transfer tax, into what you can afford.

Buy what you can afford

Once you’ve determined the amount of mortgage you could afford, be sure to stick to it and only buy what you can realistically afford. It can be easy to get caught up dreaming about a brand new house or looking at the biggest on the block. Remember, however big or small, the memories you make within that home are the most important.

Learn more about QuestMortgage.

All rates are subject to borrowers meeting QuestMortgage standard credit criteria and are subject to change at any time without notice. The interest rate is guaranteed for up to 120 days from the date the application is pre-approved. If the mortgage is not funded within 120 days from the date the application is pre-approved, the interest rate guarantee expires.

The information in this blog is for information purposes only and should not be used or construed as financial or investment advice. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade Group of Companies, its affiliates or any other person to its accuracy.

• How much is a typical down payment?
• Do I need mortgage default insurance?
• What are my options if I don’t have 20% of my down payment saved?

With housing prices on the rise across Canada, one of the most common questions first-time home buyers ask is, “Do I have enough money for a down payment?” We’re here to help answer that question and explore the options available to you to help you become a homeowner sooner.

What is a down payment?

Let’s start with the basics. A down payment represents a percentage of the total cost of your home that you pay up front and does not come from a mortgage lender.

If you’ve been saving up for a down payment, then you’ve likely heard of the 20% down rule. This conventional wisdom recommends putting down 20% of the overall cost of the home as a down payment.

Doing so offers many benefits, such as eliminating the need to buy mortgage default insurance. However, saving 20% for a down payment is a significant financial feat, especially in large cities like Toronto, Montreal, and Vancouver. With the average home in Canada now costing upwards of $500,000, a $100,000 down payment (20% of $500,000) may not be an attainable goal for many.

How much is a typical down payment?

Real estate prices in Canada have been on the upswing, meaning the typical size of a down payment has also increased. The minimum down payment in Canada is 5%, but the amount of a typical down payment will depend on the price of the house you’re looking to buy. Here’s an outline of what’s legally required as a down payment for guidance.

• $500,000 or less – 5% of the purchase price
• $500,000 to $999,999 – 5% of the first $500,000 and 10% of the purchase price above $500,000
• $1,000,000 or more – 20% of the purchase price

Here are a few examples of the minimum down payment required for different purchase prices.

These figures are specific to owner-occupied properties and are different for multi-unit or rental properties.

What’s mortgage default insurance?

Mortgage default insurance protects the lender if the borrower defaults on the mortgage. It is required on all mortgages with down payments of less than 20% (known as high-ratio mortgages) where the value of the property is less than $1,000,000.

There are three mortgage default insurance providers in Canada: Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, and Canada Guaranty. Learn more.

What are my options if I don’t have the 20% down payment?

If you don’t have the 20% down payment, it’s not a problem. There are a few options available to you that can make homeownership more affordable.

1. Purchase a home with less than 20% down

In today’s market, it’s absolutely possible to purchase a home with less than 20% of the purchase price and many Canadians do so. Purchasing a home with mortgage default insurance allows you to enter the market quicker to start gaining equity.

2. Open a First Home Savings Account (FHSA) and focus on saving

If you’re saving for a down payment, you can start early by opening an FHSA account and start saving. With an FHSA, you can contribute an annual tax-deductible amount of up to $8,000 with a lifetime contribution maximum of $40,000 per person for a home purchase. What’s great about an FHSA is that your contributions are tax deductible and any qualifying withdrawals from the account for a home purchase are tax-free. To learn more, please check our helpful article here.

3. Take advantage of the first-time home buyer program in Canada

Luckily, there is a first-time home buyer program in Canada that you can check out that can make homeownership more affordable. The Home Buyers’ Plan allows you to withdraw up to $35,000 tax-free from your RRSP (Registered Retirement Savings Plan) when you purchase your first home.

4. Buy with a partner or friend

Having a co-applicant can make the mortgage buying process easier. If you feel comfortable, you could have a chat with a partner or close friend about homeownership. In expensive markets, the more creative you can be – the better.

5. Ask a relative for support

In some situations, it could be worthwhile to ask a relative and see if they can help with the down payment. A gift from an immediate family member can go a long way.

As you can see, putting 20% down for your first home is an impressive financial achievement. However, it is simply not attainable for everyone in today’s market. If you’ve already started saving for a down payment, it could be helpful to check our rates page to see what kind of rate you could qualify for.

Already put an offer in on a house? Start your application with QuestMortgage and see what rate you could qualify for. Get my rate.

The information in this blog is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade Group of Companies, its affiliates or any other person to its accuracy.

An important consideration for home buyers is the down payment they need to prepare for a home purchase.

A down payment is one of the initial costs you’ll have to pay upfront when purchasing a home. It’s the percentage of your house price that is not covered by a mortgage lender and needs to be provided from other sources.

You may have been preparing your down payment for a while now. The good news is, there are few down payment options out there that you can consider. They include the following:

First Home Savings Account (FHSA)

If you're a first-time homebuyer, you can open a First Home Savings Account (FHSA) to start saving for a down payment. The FHSA has the benefits of both an RRSP and TFSA, which allows you to have contributions that are tax deductible and any qualifying withdrawals from the account for a qualifying home purchase are tax free. You can contribute an annual tax-deductible amount of up to $8,000 with a lifetime contribution of $40,000 per person. Just like an RRSP and TFSA, you can invest and hold different investment securities inside an FHSA, making it a great tool to save for a future home purchase.

Here are other key information about the FHSA:

• You must be a first time home buyer at the time you make the withdrawal. This means that you cannot have owned a home, in any part of the calendar year before the withdrawal or in the past four calendar years.
• You can carry forward any unused contribution in the subsequent year up to a maximum of $8,000 per year on top of the contribution limit of $8,000. The carry-forward amounts begin to accumulate only after you open your FHSA.
• You can transfer funds from an FHSA to another FHSA account, RRSP or a RRIF tax free. When you transfer from an FHSA to an RRSP or RRIF, the transfer will not reduce, or be limited by, your available RRSP contribution or restore your FHSA annual contribution limit.
• You don’t need to pay back the withdrawn money from an FHSA, compared to the RRSP Home Buyers’ Plan.

Home Buyers' Plan

If you're a first-time home buyer, you may be eligible for the Government of Canada’s Home Buyer’s Plan (HBP). The HBP allows individuals to borrow up to $60,000 (or $120,000 with a spouse or common-law partner) from an RRSP (Registered Retirement Savings Plan).

It is tax-free when you withdraw under Home Buyers' Plan but you have up to 15 years to pay it back into your RRSP. Repayments begin in the fifth year after the year in which you withdraw the funds (if the funds are withdrawn between January 1, 2022 and December 31, 2025). For example, if you’re withdrawing $120,000 from your Home Buyers’ Plan this year, in five years you’ll have to start repayment of a minimum of $8,000 ($120,000 / 15 years = $8,000) each year.

To be considered a first-time home buyer, neither you or your spouse or common-law partner could have owned and occupied a home in the four-year period before a home purchase. If you've owned a home before, you can still be considered a first-time home buyer as long as you have not owned and occupied a home in the four-year period.

The four-year period starts on January 1, four years before the year you withdraw from your RRSP, and ends 31 days before the date you withdraw those funds. Let’s say you are withdrawing your down payment funds on August 31, 2022. Simply count 31 days backwards (July 31, 2022) for the end of the period and then count 4 years back (to January 1, 2018) for the start of the period. This also means that you nor your spouse or common-law partner should be on title on any property from January 1, 2018 to July 31, 2022. If one of you owned a property however in that period, you won’t be eligible for the Home Buyers’ Plan while the other can.

To learn more about other eligibility requirements for HBP, please check this article from the Government of Canada.

Note that you must hold an RRSP contribution in your RRSP account for at least 90 days before you can withdraw under HBP.

If you qualify and wish to know the next steps with participating in the Home Buyers’ Plan, please check this helpful article.

Personal savings or investments

Personal savings may be one of the most conventional ways of getting your down payment. Some people hold their savings in a high-interest savings account with a bank while others hold a TFSA (Tax-Free Savings Account) carrying different types of investments.

A TFSA is an alternative option when it comes to saving for a down payment as it retains the flexibility of withdrawing funds tax-free. Moreover, any investment under a TFSA is non-taxable (for capital gains and dividends with some exceptions). When people save a down payment under a TFSA, they typically hold low volatility investments. Examples of these can include bonds or other fixed income assets which offer some protection in market downturns. While this may look different from person to person, it’s always important to consider your time horizon when investing before a home purchase.

For verification of down payment in any savings or registered accounts, it’s best practice to hold the money in the account for at least 90 days before you can withdraw it for a down payment.

Gifted funds from family members

A financial “gift” for a down payment is another option for many buyers. These are funds that come from immediate family members and are not subject to tax. Immediate family members can be your parents, grandparents, or siblings.

In most instances, there’s no limit on how much you can receive as a financial gift. As a general rule, you need to submit a gift letter when making a down payment with gifted funds.

A gift letter is a document that borrowers and donors (the immediate family members gifting the funds) sign to ensure that the donors are helping the borrowers with the down payment via a gift and not lending the money. Common information in gift letters includes the names of the borrower and donors, the donors’ relationship to the borrower, date of the gift, and gift amount.

When you’re preparing a gift letter, it should include a signed statement highlighting that the money is a gift and there’s no obligation to repay it back to the donors.

Please note: Be prepared to provide a bank statement showing that the gifted funds are in your (the borrower’s) account for at least 15 days before the closing date of the purchase of your home.

Home sale proceeds

If you’re an existing home owner, you can use your home sale proceeds as part of a down payment. You can use all or part of the down payment from the sale proceeds as long as you provide certain documentation to verify the selling of your home.

This documentation may include:

• Agreement of Purchase and Sale
• Mortgage statement (if you still have a mortgage on the property)
• Statement of adjustment from a lawyer
• Bank statement (to show deposited funds after the sale)

To know more about other documents that you’d need to prepare for a mortgage application, please check our helpful article here.

The information in this blog is for informational purposes only and should not be used or construed as real-estate, mortgage, financial or investment advice.

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