Canadian Mortgage Guide

1. How Much Mortgage Can You Afford?

Canadian mortgage lenders use two key ratios to determine how much you can borrow: GDS (Gross Debt Service) and TDS (Total Debt Service). Both are calculated as a percentage of your gross monthly income.

For a conventional mortgage (5% down or more), lenders require both ratios to be within strict limits. For insured mortgages (less than 5% down), the limits are slightly relaxed.

Rule of thumb: If you earn $100,000/year gross, your maximum mortgage is approximately 4.5× your income, or $450,000. This assumes low other debts and follows the GDS/TDS rules below.

2. GDS and TDS Ratios

GDS (Gross Debt Service Ratio) measures only housing costs as a percentage of gross income.

GDS includes: mortgage payment + property tax + condo fees + 50% of heating costs.

Maximum GDS: 39% for conventional mortgages, 39% for insured mortgages (some lenders go to 40%).

TDS (Total Debt Service Ratio) measures all debt payments (housing + other debts) as a percentage of gross income.

TDS includes: mortgage payment + property tax + condo fees + 50% heating + car loans + credit card minimums + student loans + any other debts.

Maximum TDS: 44% for conventional mortgages, 44% for insured mortgages (some lenders go to 45%).

Example: If you earn $6,000/month gross and have a $500/month car payment:

• Max GDS: $6,000 × 0.39 = $2,340 (housing only)
• Max TDS: $6,000 × 0.44 = $2,640 (all debts)
• Available for housing after car payment: $2,640 - $500 = $2,140

If you want to buy, paying off high-interest debts first increases your mortgage approval amount substantially.

3. The Mortgage Stress Test

Canada’s mortgage stress test (mandatory since 2018) requires all borrowers to qualify at a higher interest rate than what they will actually pay. This protects against rising rates.

Current stress test rate (2026): The higher of:

• Bank of Canada policy rate + 2% (currently ~6.25%)
• Your actual mortgage rate + 2%

Example: If you’re approved for a 5% mortgage but the policy rate is 4.25%, you must qualify at 6.25% (the higher of the two). This means your GDS/TDS ratios are calculated at 6.25%, even though you’re paying 5%.

This significantly reduces the amount you can borrow. Paying down other debts before applying improves your chances of approval.

4. Down Payment Rules and CMHC Insurance

Canada requires different down payment minimums based on purchase price:

• Under $500,000: 5% minimum down ($25,000 on a $500,000 home)
• $500,000 - $999,999: 5% on first $500k + 10% on amount above ($50,000 on a $600,000 home)
• $1,000,000+: 20% minimum down (no CMHC insurance available)

CMHC Insurance Cost: If your down payment is below 20%, you must purchase mortgage default insurance. Premium ranges from 1.6% to 4.2% of the mortgage, depending on the down payment amount.

• 5% down: ~3.6% insurance premium
• 10% down: ~2.8% insurance premium
• 15% down: ~2.4% insurance premium
• 20% down: No insurance required

Cost example: On a $500,000 mortgage with 10% down ($50,000), you owe $450,000 mortgage + ~$12,600 insurance = $462,600 total to repay.

Even a small increase in down payment can save tens of thousands over your mortgage lifetime by avoiding insurance premiums altogether.

5. Fixed vs Variable Rate Mortgages

Fixed-Rate Mortgage: Your interest rate and monthly payment are locked in for the term (typically 1-10 years).

• Pros: Payment certainty, easier budgeting, protection against rising rates
• Cons: Typically higher rate than variable, less flexibility
• Best for: Most homebuyers, especially first-time buyers and those on tight budgets

Variable-Rate Mortgage: Your interest rate fluctuates with market conditions (usually tied to the prime rate). Monthly payment may stay the same (with portion going to principal changing) or payment adjusts if rate increases.

• Pros: Initial rate discount (0.5-1% lower than fixed), lower initial cost
• Cons: Rate uncertainty, budget risk if rates spike, possibility of payment shock
• Best for: Risk-tolerant borrowers with strong emergency funds and rate buffers

The math: A $400,000 mortgage at 5% (fixed) vs 4.5% (variable) seems small until you compound it over 25 years. Variable saves you ~$18,000 in interest if rates stay stable. But if rates rise to 6%, that saving disappears and your payment increases.

6. Mortgage Renewal Strategy

After your mortgage term ends (e.g., 5 years), your mortgage renews for a new term at a new rate. This is one of the most important moments in homeownership — a small rate difference compounds to tens of thousands of dollars.

Start shopping 4-6 months before renewal. Your lender will offer a renewal rate, but you’re not obligated to accept it. Other banks will compete for your business.

Typical renewal rate advantage: Shopping for a new rate instead of auto-renewing can save 0.3-0.8% on your mortgage. On a $400,000 mortgage, 0.5% savings = $2,000/year, or $10,000 over a 5-year term.

Renewal checklist:

1. Start shopping 4-6 months before renewal date
2. Get quotes from at least 3 banks + mortgage brokers
3. Compare rates, terms, and features (rate hold, early payout options)
4. Don’t wait until renewal — lenders will assume you’ll accept and may not offer their best rate
5. If switching banks, understand discharge fees from your current lender

Use our Mortgage Comparison Calculator to model scenarios and ensure you’re making the right choice.