How much house can you afford in Canada?

A bank pre-approval letter reads like an answer: a single number, printed on letterhead, that feels like the ceiling on what you can buy. It isn't quite that. It's the output of two ratio tests run against your income and debts, re-checked at a rate you probably won't actually pay, before a cent of closing costs or ongoing maintenance enters the picture. Understanding the mechanics behind that number — not just the number itself — is what lets you tell a real ceiling from a starting offer.

Everything below applies to a federally regulated lender: a bank, a trust company, most credit unions above a certain size. A private lender or a mortgage on terms outside that framework can run different rules, which is worth knowing before you assume any pre-approval is directly comparable to another.

What a lender actually checks: two ratios, not one

The first test is GDS — gross debt service. It's your housing costs, all in, as a share of monthly income: the mortgage payment (principal and interest), property tax, heating, and half of any condo fee. Lenders cap this at a set percentage of gross monthly income, tighter for a conventional mortgage than an insured one.

The second test is TDS — total debt service. It's the same housing costs plus every other debt payment you carry: car loans, student loans, minimum credit card payments, a line of credit you're servicing. TDS gets a higher ceiling than GDS, because it's allowed to include more, but existing debt eats into it directly — a car payment and a stack of card minimums can quietly become the binding constraint even when housing costs alone would have passed easily.

Both ratios have to clear their limit. Whichever one is tighter for your specific numbers is the one that actually sets your borrowing cap — which is exactly why two households with identical income can qualify for different mortgage amounts. The affordability calculator runs both ratios against your own income and debts rather than a hypothetical one.

The stress test: qualifying at a rate you won't pay

Here is the part that catches most first-time buyers off guard. The GDS/TDS ratios above aren't run against the rate your lender is offering you. They're run against a qualifying rate — your contract rate plus a fixed spread, or a separate minimum floor rate, whichever is higher. This is federal mortgage policy (the "stress test"), and it applies whether your down payment is large or small, insured or conventional.

The logic is straightforward: rates move, and a lender doesn't want to approve a mortgage that only works at today's rate. The effect on you is less obvious until you see it worked through — the qualifying rate can shrink your maximum mortgage by a meaningful margin compared to what the same payment would buy at your actual contract rate, because a higher rate means more of every payment goes to interest and less to principal, which means a smaller loan supports the same monthly payment.

A worked example, start to finish

Take a household with $120,000 combined gross annual income — $10,000 a month — carrying $500 a month in existing debt (a car payment and card minimums) and expecting roughly $300 a month in property tax and heat on the home they're looking at.

GDS is the tighter test here, so it sets the ceiling — the household's mortgage payment (principal and interest only) is capped at $2,900 a month, regardless of how much room TDS would otherwise allow.

Now the stress test changes what that $2,900 actually buys. Say the lender's contract-rate offer is 4.75%, but the mortgage has to qualify at 6.75% under the spread-over-contract-rate rule:

The gap — roughly $89,000 of borrowing power — exists purely because of which rate the math runs on. With a $50,000 down payment added to the qualifying-rate mortgage, this household's real ceiling is a purchase price near $469,700, not the higher figure the contract rate alone would suggest. This is the single most common reason a buyer's mental math and a lender's pre-approval land in different places.

Run your numbersHome affordability→

CMHC insurance: the cost of a smaller down payment

Putting down less than 20% means the mortgage needs default insurance — commonly called CMHC insurance, after the largest of the three insurers, though private insurers offer the same product. It isn't optional at that down payment level, and it isn't a fee you pay out of pocket at closing: the premium is calculated as a percentage of the loan and added to the loan balance itself.

The premium percentage rises with your loan-to-value ratio (the mortgage as a share of the home's price) — a smaller down payment means a higher percentage, on top of a larger loan, which compounds. Continuing the example above: a $419,700 mortgage against a $469,700 purchase price is an 89.4% loan-to-value ratio, landing in the band that runs a premium in the low-3% range.

At roughly 3.1% on a $419,700 loan, that's about $13,000 added to the mortgage — raising both the balance and, marginally, the monthly payment, since it's amortized along with everything else. Below 80% loan-to-value (a 20%+ down payment), none of this applies; the mortgage is conventional and uninsured. Above a certain purchase price, insurance stops being available at any down payment, and 20% conventional becomes the only route in.

Minimum down payment itself is tiered, not flat: a lower percentage applies to the first few hundred thousand dollars of price, a higher percentage to the portion above that, up to the price ceiling where insurance disappears entirely. A buyer putting the legal minimum down, rather than the $50,000 in the example, would land at a higher loan-to-value and a higher premium band — worth running through the down payment calculator before assuming a bigger down payment only helps at the margins. The down payment guide walks through the size-of-down-payment decision in more depth, including when putting down more than the minimum genuinely pays for itself and when it doesn't.

Closing costs a pre-approval never mentions

None of the math above includes the costs due on closing day, separate from the down payment itself. Land transfer tax (and in some cities, a second municipal transfer tax), legal fees, title insurance, a home inspection, adjustments for prepaid property tax or utilities, and a new-purchase estoppel certificate fee for a condo all land at once, in cash, on top of the down payment. As a rule of thumb, budgeting one and a half to four percent of the purchase price for closing costs — the range depends heavily on the city, mainly because of how land transfer tax is structured locally — keeps this from being the expense that derails a move-in date.

Why pre-approval is a ceiling, not a budget

A pre-approval answers one question: what will the ratios and the stress test allow. It doesn't ask whether spending right up to that number leaves room for a maintenance fund, a slower savings pace for a while, or the ordinary cost of furnishing a larger place. Two households pre-approved for the identical amount can have very different comfort at that payment, depending on how stable their income is and how much else they're carrying.

It's worth running the numbers a second way before committing to an offer: not "what's the most I can borrow" but "what payment do I want to carry, and what does that imply about price." Comparing that answer against renting the same budget for a few more years — rent versus buy covers the full comparison, not just the monthly payment — is a useful check before signing anything. And because a mortgage doesn't end at closing, it's worth knowing early that most fixed terms come up for renewal well before the amortization is finished; the mortgage renewal guide covers what changes at that point and how to prepare for a rate that may look nothing like the one you started with.