Wondering how much you’ll be able to borrow to buy a home? Learn about the key factors that affect your borrowing capacity, how it’s calculated, and our tools to help you estimate it.
What is borrowing capacity?
Borrowing capacity is the maximum amount a borrower can obtain from a mortgage lender based on their gross income, current debts, and down payment.
It is calculated using standardized debt ratios: specifically, the GDS (gross debt service) and TDS (total debt service) ratios.
These calculations help financial institutions determine whether you qualify for a mortgage and how much you can borrow, ensuring you don’t take on more debt than you can reasonably manage. Your borrowing capacity can vary depending on the interest rate, amortization period, property-related costs, and the type of loan you choose.
GDS and TDS ratios: what they are, recommended limits, and comparison table
GDS and TDS ratios are used to assess your ability to meet your monthly financial obligations without risking your financial stability.
Comparison table: GDS and TDS
| Criteria | GDS | TDS |
|---|---|---|
| Includes housing costs | Yes | Yes |
| Includes personal debts | No | Yes |
| Recommended maximum | ≤ 32% | ≤ 40-44% |
| Purpose | To assess housing-related costs | To assess overall repayment capacity |
| Flexibility based on profile | Average | Varies (stricter if debt levels are high) |
| Is used to… | Determine if the home is affordable | Determine if the borrower is at risk of overborrowing |
How is the GDS ratio calculated?
The gross debt service (GDS) ratio represents the percentage of your gross monthly income that goes toward housing-related expenses, whether you own or rent. This includes mortgage payments or rent, municipal and school taxes, heating costs, and condo fees.
To calculate your GDS, add up your total annual housing costs, divide that amount by your household’s gross annual income, then multiply the result by 100.
To qualify for a conventional mortgage, your GDS typically needs to be 32% or less of your gross monthly income.
How is the TDS ratio calculated?
The total debt service (TDS) ratio goes further by including your housing costs and all your monthly debts. It provides a complete picture of your debt load and your actual ability to repay.
To calculate your TDS, add up all your monthly debts and housing expenses. Then divide this total by your household gross annual income and multiply the result by 100. Generally, your TDS should not exceed 40% to 44%, depending on your financial profile and the lender’s policies.
How to estimate your borrowing capacity
Several tools and methods can help provide a realistic estimate of your mortgage borrowing capacity by factoring in total costs and loan term options.
Use our mortgage affordability calculator calculator
Wondering how much you can afford to pay for your dream property? Our online calculator helps you estimate your borrowing capacity.
To use this tool, you’ll need to enter:
- Your gross annual income (and your co-borrower’s, if applicable)
- Your down payment
- Your desired amortization period
- An estimate of the mortgage interest rate you expect to pay
- Your monthly debts
- An estimate of your heating and electricity costs
- Your municipal and school taxes
- Your condo fees
Note that the result from our tool is for informational purposes only. Don’t hesitate to contact your Multi-Prêts broker for a precise assessment.
Which types of income are applicable?
Your gross income (or your household’s gross income) is a good indicator of how much you may be able to borrow. Only stable and recurring income is taken into account. This includes investment income and pensions from private or government plans. Not all lenders include work-related bonuses, and some may only count them partially or under certain conditions. A portion of your rental income may also be considered; the same goes for family allowances, which may not be fully included.
The calculation is different for self-employed individuals, who must provide proof of income for the past two years and show that their taxes have been paid to the Canada Revenue Agency.
How are debts and monthly obligations factored in?
Your debts affect your borrowing capacity by reducing your available income, which, in turn, increases the lender’s level of risk. A poor credit score or a high debt ratio could prevent you from qualifying for favourable mortgage terms.
Debts include:
- Loans (e.g., student loans, car loans, personal loans)
- Car lease monthly payments
- Credit card balances
- Lines of credit
- Alimony or support payments
- Co-signed loans
Other factors that affect your borrowing capacity
Your borrowing capacity also depends on your down payment, the interest rate, and the costs associated with buying the property.
The impact of your down payment
The larger your down payment, the more you may be able to borrow. By reducing the amount you need to finance, you lower the lender’s risk and improve your chances of approval. A higher down payment can also help you avoid paying the CMHC insurance premium, which applies when your down payment is less than 20% of the property’s total value.
Find out more in our full guide on the advantages of making a 20% down payment.
Interest rates
The interest rate directly affects your monthly mortgage payment, and therefore your borrowing capacity. A lower rate means you can borrow more for the same monthly payment. To choose the right type of mortgage rate for your situation, consult our guide on fixed vs. variable rates, which explains the advantages and disadvantages of each.
Notary fees and municipal taxes
These costs are not included in the borrowing capacity calculated by lenders, but they should be factored into your overall budget.
- Notary fees: These fees (which are mandatory in Quebec) cover the drafting of the deed of sale and the registration of the mortgage. Notary fees are around $1,000 to $1,800.
- Welcome tax: A property transfer tax payable upon purchase, calculated based on the property’s value (often several thousand dollars).
- Municipal and school taxes: To be included in your annual budget. A portion may be due as soon as you take possession.
Don’t forget to include the annual costs associated with owning a home and everyday living expenses. It’s important to be realistic about your overall expenses rather than targeting a property that is too expensive for your means and leaving you unable to make ends meet.
There are also assistance programs that can help you obtain additional discounts or credits to increase your borrowing capacity (for first-time buyers, energy-efficient renovations, etc.).
How to increase your borrowing capacity
A few simple steps can help you boost your home-buying power.
Reduce your existing debt
Focus on paying off high-interest debt, such as credit cards, and consider closing unused lines of credit.
Debt consolidation may also be a helpful option if managing multiple payments is causing you stress.
Increase your eligible income
Make sure to declare all your stable income, account for any income from rentals or regular allowances, and try to avoid periods with no income. Adding a financially reliable co-borrower can also help increase your borrowing capacity.
Avoid making credit purchases before you get loan approval
Use your credit cards sparingly and avoid opening new accounts. If possible, wait for final loan approval before making major purchases or applying for additional financing.
Example of borrowing capacity calculation
Here’s a simple example to show you how lenders assess your borrowing capacity based on your financial profile.
| Profile | Annual income | Monthly debts | Down payment | Estimated borrowing capacity |
|---|---|---|---|---|
| Family with 2 children | $120,000 | $1,000 | 10% | $400,000 |
| Single young professional | $75,000 | $300 | 5% | $275,000 |
| Couple without children | $95,000 | $600 | 20% | $360,000 |
| Self-employed worker | $110,000 | $1,200 | 15% | $340,000 |
| Retiree with pension | $65,000 | $0 | 25% | $230,000 |
Estimate your borrowing capacity with the help of a Multi-Prêts expert
Your borrowing capacity depends on many factors. Our mortgage brokers are ready to analyze your situation, optimize your financial ratios, and provide a realistic estimate of how much you can borrow based on your income, debts, and down payment.
Key takeaways
- Your debt ratio and credit history affect your borrowing capacity.
- The higher your borrowing capacity, the more favourable your mortgage terms will be.
- A few simple steps can help increase your borrowing capacity.