Real Estate

Income Needed for a Mortgage in Canada

Income Needed for a Mortgage in Canada
Written by
  • Ashley Howard
| 29 May 2024
Reviewed, 29 May 2024

Table of contents

    Are you dreaming of owning a home but not sure you have the income to qualify? Home prices have dramatically increased across the country, making it much harder for someone who earns the average Canadian income to purchase a home. 

    Adding to housing price pressures, prospective homeowners currently face high interest rates, which can be a significant barrier to qualifying for a mortgage. This post will cover the income needed to qualify for a mortgage across Canada and the factors that are considered when determining home affordability.

    Key Takeaways

    • Affordability is assessed based on your credit score, income, and debt service ratios. 
    • 5 of 10 provinces require an income under $100,000 to qualify for a mortgage in 2024.
    • For each additional $100,000 in mortgage amount, the income required increases by approximately $26,000.

    Calculating Mortgage Affordability

    When lenders look at mortgage affordability, they look at more than just your income. They will also look at your credit score, existing debts, and what you have saved for a downpayment to determine if you have the capacity to take on a mortgage. You will also be required to pass the stress test to ensure you can still afford mortgage payments if interest rates increase.

    Debt Service Ratios

    Lenders evaluate your ability to handle additional debt by analyzing 2 debt service ratios: gross debt service (GDS) and total debt service (TDS). These ratios are used to determine if you can afford to make mortgage payments and are part of the qualifying criteria lenders use when assessing affordability. 

    GDS calculates all household debt against your qualifying income, while TDS calculates the total debt against your qualifying income. Some lenders may have different qualifying limits on GDS and TDS based on their risk appetites. 

    You can calculate your GDS and TDS ratios by using the following formulas:

    GDS Ratio= (Mortgage Payment + Property Taxes + Hydro+[Condo Fees/2]) / Monthly Income

    TDS Ratio = (All debts in GDS calculation + all other debts) / Monthly Income

    Typically, if you purchase a home under $1 million and choose an insured or insurable mortgage, you will be limited to a maximum GDS of 39% and TDS of 44%. You may be restricted to a GDS of 32 and a TDS of 40 if you have a lower credit score. 

    If you purchase a home valued over $1 million or choose an uninsured mortgage, you may be limited to lower debt service ratios, such as a GDS of 35 and a TDS of 42. 

    Loan-To-Value Ratios

    Loan-to-value (LTV) ratios are calculated using your remaining mortgage balance over the property’s current value. If you’re a new homeowner, the LTV is calculated using the property’s purchase price minus the downpayment over the property’s purchase price. 

    Remaining Mortgage Balance / Assessed Property Value

    (Purchase Price – Downpayment) / Purchase Price

    The LTV ratio will determine if you need a high or low ratio mortgage and need to purchase mortgage default insurance. This will impact the rates you qualify for and your affordability. A higher LTV can be considered riskier, as more of your home’s value is borrowed. 

    Mortgage Stress Test

    To qualify for a mortgage with a federally regulated financial institution (FRFI), you must pass the mortgage stress test, proving you can afford mortgage payments if interest rates increase. You are stress-tested based on the interest rate you are offered plus 2% or the benchmark rate of 5.25%, whichever is higher. 

    Qualifying at a higher rate than you are offered will impact your affordability and the mortgage you qualify for. The stress test impacts your qualifying ratios since you must qualify on a much higher interest rate and monthly mortgage payments. 

    The stress test acts as a safeguard for borrowers, ensuring they are not overleveraged when taking on mortgage debt while minimizing the risk to lenders of borrowers defaulting on their mortgages. 

    Mortgage Default Insurance

    If you are putting down less than 20% as a downpayment, you will need an insured mortgage, which caps your maximum amortization at 25 years and the purchase price of a home to less than $1 million. 

    You will also be required to purchase mortgage default insurance, which can be paid upfront or added to your mortgage balance. Adding the amount to your mortgage balance will increase the amount you need to qualify and borrow, decreasing your purchasing power. 

    Income Needed to Afford a Home Across Canada

    Home prices vary significantly across Canada, so the income needed to qualify will vary greatly depending on where you live. The chart below shows the gross combined household income required to qualify for the average mortgage in each province using benchmark property prices sourced from CREA as of May 28th, 2024.  

    Our calculations are based on the average insured 5-year fixed mortgage rate (5.47%) from the Big 6 Banks as of May 28th, 2024. These values are stress-tested on a qualifying interest rate (7.47%), 2% higher than the average rate. 

    We use a 25-year amortization, 20% downpayment, provincially averaged 2023 property tax rates and $100 monthly heating costs to determine the income needed. 

    Home Price 2024 Income Needed 2024
    Canada $735,900 $154,122
    British Columbia $984,900 $205,230
    Alberta $513,600 $110,075
    Saskatchewan $339,800 $75,784
    Manitoba $382,658 $103,891
    Ontario $839,200 $188,241
    Quebec $481,600 $105,631
    New Brunswick $304,400 $77,654
    Nova Scotia $415,400 $89,404
    Prince Edward Island $355,500 $82,152
    Newfoundland and Labrador $292,000 $63,011

    Income Needed to Qualify Based on Mortgage Amount

    Since home prices vary widely across the country, the chart below highlights the income needed to qualify based on the mortgage amount in 2024. 

    For each additional $100,000 in mortgage balance you carry, the income required to qualify increases by approximately $26,000. The income needed to carry a $1 million mortgage doubles to roughly $53,000 compared to a $900,000 mortgage due to a higher qualifying interest rate. 

    With the exception of the $1 million mortgage amount, our calculations are based on the average insured 5-year fixed mortgage rate (5.47%) from the Big 6 Banks as of May 28th, 2024. These values are stress-tested on a qualifying interest rate (7.47%), 2% higher than the average rate. 

    The $1 million mortgage amount is based on the average uninsured 5-year fixed mortgage rate (6.84%) from the Big 6 Banks as of May 28th, 2024, with a stress-tested qualifying interest rate of 8.84%. 

    To determine the income needed, we use a 25-year amortization, 20% downpayment, a 1% property tax rate as a national average (rates vary by province and municipality), and $100 monthly heating costs. 

    Mortgage Amount Income Needed 2024
    $100,000 $28,734
    $200,000 $54,390
    $300,000 $80,047
    $400,000 $105,703
    $500,000 $131,360
    $600,000 $157,016
    $700,000 $182,673
    $800,000 $208,330
    $900,000 $233,986
    $1,000,000 $286,665

    Frequently Asked Questions

    Should I choose a 25-year or 30-year amortization?

    Choosing the shorter 25-year amortization can help you save on interest-carrying costs over the life of your mortgage. However, a 30-year amortization will help lower monthly payments, give you more purchasing power, and help you qualify for a mortgage.

    What additional costs are associated with buying a home?

    There are many other costs to consider when purchasing a home outside your mortgage and downpayment. You should set aside additional funds to cover closing costs like land transfer taxes, home inspection fees, appraisal fees, mortgage default insurance (if applicable), title insurance and more. You will also need to budget for property taxes and provincial or federal sales taxes that may be applicable.

    How can I determine what I can afford on my salary?

    Generally, you can afford approximately 3 to 3.5x your annual income as a mortgage. However, depending on property tax rates and municipal taxes, these ratios may differ if you live in an area with higher taxes.

    Final Thoughts 

    The increase in home prices has made it difficult for many borrowers, especially first-time buyers or those with lower incomes, to purchase a home. Rising prices and stricter lending criteria have made it challenging to qualify for a mortgage on an average salary. 

    The stress test, which requires borrowers to prove they can afford higher interest rates, adds to this difficulty. Overall, these factors have created an affordability crisis in the housing market, leaving many struggling to find a home within their budget.

    Don’t let these numbers hinder your mortgage strategy. Reach out to one of our mortgage professionals today to learn how much mortgage you can afford.