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How many times my salary can I borrow for a mortgage?

by Corben Grant on 08 Feb 2022

If you’re looking into getting a mortgage, one of the first steps is figuring out just how much you can afford. There are many factors that can affect how much mortgage you can afford. These will include your income as well as your credit score and mortgage rate, debt capacity, and more.

One common way of understanding how much mortgage you can afford is by determining an amount based on how many times your salary the mortgage costs. For home buyers at the very start of the process, this can give you a general idea of what price range you can expect to buy in.

However, your salary will not tell the whole story when it comes to how much mortgage you can afford, so for more specific figures, you may need to do further calculations or talk to a lender or mortgage professional.

Two ways of approaching the question

There are a couple of ways to interpret the question of how much your salary determines the price of your home.

The most common is based on the idea that you will need to pay a monthly mortgage payment. Your monthly mortgage payments will scale depending on factors like your down payment, mortgage rate, amortization and more.

Naturally, your monthly payment will have to be less than your monthly income and allow for additional cash for things like utilities, home insurance, condo fees and property taxes, as well as general life costs like food, transportation, and entertainment.

Another way to look at the question is how your salary affects your ability to buy a house in general. That is, given how much money you make, how long would it take you to afford a down payment? This can help you plan your savings by deciding how soon you want to buy and seeing what you can afford to buy if you save until then.

Figuring out these two together should give you a pretty good idea of your financial picture and how viable your house purchase will be and how much you can afford to borrow.

How much mortgage can I afford based on my income?

First, you should figure out what your actual available income is by subtracting any monthly payments that go towards existing debt. For example, if you have a gross income of $100,000 a year but spend $5,000 to service your debts, you should start with $95,000.

Generally speaking, the rule is that you can be approved for a mortgage for which your salary is about 20% to 30%, or about three to fives times your salary. So with the salary mentioned above, you could be approved for a mortgage up to around $320,000. Now, you may also have a partner with whom you are sharing the purchase, so naturally, you can add your incomes together and get a higher possible mortgage.

In addition, this is only the mortgage amount you actually borrow, which does not include your down payment. So, for example, for a home with a purchase price of $800,000 with 20% down, you would only need to actually borrow about $640,000 for your mortgage principal.

Now, you should also consider that there are upper limits on your mortgage for a reason. Though you may be able to afford a mortgage at 30% of your salary, you should carefully decide if this is right for you. You may get a nicer property by going for a high home price, but you will also have more debt and potentially higher payments.

This could mean you have less disposable income to spend on other things you need or enjoy. Depending on your preferences, you may find it more worthwhile to take out a mortgage at 20% of your salary and have some more extra money left over.

How mortgage lenders actually calculate how much you can borrow

The reality is that a mortgage lender is going to look at much more than your salary when it comes to approving a mortgage loan. This is why when you are looking to get a house, it’s important that you talk to a lender and submit a mortgage application to get pre-approved.

With a mortgage pre-approval, you can know exactly what your maximum loan amount can be, rather than trying to guess at a figure yourself that may end up being incorrect. This will also help your real estate agent find you homes that are suitable for your budget.

Credit score

Most lenders will consider your credit score in order to determine that you do not only have an income but how responsible you are with it and how reliable of a borrower you are. If your lender thinks you are a responsible borrower, they will be less likely to give you a loan.

Debt service

Lenders will also be looking at the amount of existing debt you own. A mortgage loan is kind of like a promise to pay back your money and the lender wants to know that you don't have too many other debts to pay the loan you are taking out.

Mortgage interest rates

Mortgage rates will also affect how much you can afford and this is one part of the equation that you don't really have much control over. Though you can help yourself get a better interest rate through a higher credit score or high down payment, for example, the underlying base rates that lenders charge are influenced by external factors.

It’s also worth considering that the bank will test your salary against an even higher interest rate in accordance with the mortgage stress test. This means that even if you can afford a certain level of mortgage now, the bank won't necessarily give you that exact rate as they need to be sure you will still be able to pay in the event of significant rate increases.

To learn more about how lenders calculate how much mortgage you can afford see our article on the subject. You can also look online for a mortgage calculator to help you easily get an estimate.

How much for my down payment?

You can also use your salary to determine how long it will take you to save for a down payment. To start, you need to figure out how much you can save in a given period, maybe in a month or a year. Again, how much you decide to save is a lifestyle choice in terms of how much you want to enjoy your money now versus saving more for later.

An example

Let's say you and your partner take in $20,000 in gross income monthly and you try to save $3,000 a month. If you want to buy a house for $800,000, you will need at least about $55,000 for a minimum possible down payment of around 6.8% or up to $160,000 for a 20% down payment.

If you keep saving at the same rate, it would take you 18 months to save up for the minimum down payment, or about 53 months (about four and a half years) for the 20% down payment. For those with a low income, it’s clear why saving for a down payment can be so daunting.

Using this calculation, you can begin to figure out how much you should be trying to save, how much your down payment will be, and how much you may need from other sources like an RRSP loan, personal loans or a family gift.

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