FirstHome: Financing

Affordability. It’s a word that gets tossed around a lot when people talk about homeownership, but what does it really mean?

Affordability is a term that’s both quantifiable (lending institutions use a formula) and a little bit subjective (lifestyle considerations factor in, too). Here’s what you need to know about affordability, and what it means for you.

Debt service ratios

For lending institutions and mortgage insurers, affordability is assessed by your gross debt service ratio and total debt service ratio.

Gross Debt Service Ratio (GDSR) Homeownership costs (mortgage payments, property taxes, heating and, if applicable, 50% of condo fees), relative to household income.

Total debt service (TDS) ratio Homeownership costs (as outlined above) plus debt payments (credit cards, lines of credit, student loans, car loans, etc.), relative to household income.

To qualify for mortgage insurance (mandatory for any home purchase with a down payment of less than 20% of the cost of the home), the highest allowable GDS ratio is 39% and the highest allowable TDS ratio is 44%.

Lifestyle expenses

Key household costs should also be considered. While they don’t affect debt service ratios, these expenditures should be included in your own budget calculations, as they add up to a large chunk of income:

  • Groceries

  • Child care

  • Mobile phone

  • Internet

  • Clothing

  • Entertainment

  • Memberships

  • Kids’ extracurricular activities

Household expenses change over time. Are there any areas where you could cut back? Or will some expenses disappear, such as when a car is paid off, or when a child leaves daycare for full-time school? Set a budget you can afford Between the numbers-driven debt service ratios used by banks, trust companies and mortgage insurers and the discretionary lifestyle expenses that also affect your bottom line, you‘ll find what affordability means for you.

Set a budget you can afford

Between the numbers-driven debt service ratios used by banks, trust companies and mortgage insurers and the discretionary lifestyle expenses that also affect your bottom line, you‘ll find what affordability means for you.

Budgeting: Saving For a Down Payment

Your home may well be the biggest purchase you’ll ever make. Most Canadians take on a mortgage so they can stretch payment out over many years. The good news is you won’t have to save the full $538,831 (the national average home price in June 2020), according to the Canadian Real Estate Association to get into your first home. You’ll have to save, a minimum of, 5 per cent of that, in this example $26,942. And don’t forget to add closing costs.

Here are a variety of ways to grow your nest egg:

  • Work hard; rack up accomplishments; ask for a raise.

  • Earn a second income with a side gig or freelance work.

  • Save cash gifts from relatives.

  • Start a budget. Use budgeting apps to stay on-track with your financial goals.

  • Save on gas and parking by walking, cycling or taking public transit.

  • Put your gym membership on hold and exercise outdoors during warmer months. Cut your cable or satellite TV.

  • Negotiate discounts with your insurance providers.

  • Ask your mobile provider for a better deal. Ditch that landline.

  • Look into less expensive ways to communicate such as free online services or cell phone plans with lower costs.

  • Pack your lunch.

  • Save daily by making your own coffee to go or drink coffee provided at the office.

  • Eat at home more often.

  • Buy groceries using a shopping list. Never shop when you’re hungry.

  • Buy (and save big) in bulk (divide bulk purchases with friends).

  • Save money in your RRSP. (You’ll be eligible to withdraw up to $35,000 from your RRSP to buy or build your first home, under the federal government’s Home Buyer’s Plan).

  • Get a roommate.

  • Downsize to a smaller rental. Move in with your parents.

  • Rent in a cheaper part of town (if it won’t boost transportation costs).

  • Nix that storage unit rental. Sell the contents.

  • Join a trading group so you can swap, not shop, for a variety of items.

  • Unclutter your home and sell items for fast cash.

  • Pay yourself first: Set up biweekly automatic transfers from your checking account to your savings account.

  • Eliminate your credit card debt. Stop paying interest on a balance!

  • Catch up with friends over a walk, not cocktails.

  • Don’t buy books or e-books. The library lends both.

  • Say no to luxury vacations and yes to staycations (at least for now).

Mortgages 101: Mortgage Basics for First-Time Homeowners

Mortgage Pre-approval

Getting ready to buy? Don’t start your house hunt without mortgage pre-approval.

Pre-approval allows you to move fast and put in an offer — crucial in competitive housing markets. We look at mortgages in more detail in our “Buying Process” section, on pages 13-16, so let’s focus on the basics here: mortgage pre-approval and why it matters.

What is mortgage pre-approval?

A pre-approved mortgage indicates a lending institution has vetted you for a specific mortgage amount after investigating your financials, including your income and credit rating. You’ll know your spending ceiling, your interest rate, and how much your monthly payments will cost. Mortgage pre-approval is the first step in the mortgage approval process.

Is my pre-approved mortgage a guaranteed mortgage?

No. Mortgage pre-approval is not the same thing as final approval on a mortgage. If you make an offer on a property, the lender will take additional steps before giving their final approval:

  • The home’s value will be assessed to ensure the purchase price is not over fair market value;

  • Your application will be updated with details specific to the property, including its purchase price and the mortgage product you selected;

  • Your credit score, income, employment and debt will be re-verified.

  • For home purchases with less than a 20% down payment, mortgage insurance is required. The final mortgage can’t be signed off on without property approval by a mortgage insurer such as Sagen.

Lock into a good mortgage rate

Mortgage pre-approval locks in a lender’s mortgage rate for a specified period — often 60, 90 or 120 days — while you house hunt. With rising interest rates this is a good way to lock in a rate. Don’t worry: if mortgage rates decrease, you can still access those.

Borrower qualifications

Under federal mortgage rules, all borrowers must pass a financial stress test of 200 basis points above their contracted rate (or the 5-year Bank of Canada Benchmark Rate: whichever is higher) to qualify for a mortgage. Aspiring homebuyers will find it harder to qualify for the same mortgage amount they would have in the past. Plan for this by revising your expectations: save a larger down payment or look for a lower priced home.

Next week we will take a look at house hunting and meet the pros who'll help you buy your first home.

Article Credit: Sagen resources such as this guide are designed to help homebuyers make financially sound choices. Check out their online resources at for more!