Buying your first home is an exciting journey, but it can also bring a sense of overwhelm – particularly when it comes to understanding how your income influences your ability to secure a mortgage. If you’re a first-time homebuyer, you might be wondering: how much do I really need to earn to qualify for a mortgage? Here’s a simple breakdown to help you start the process.

Understanding mortgage qualification

When lenders evaluate your mortgage application, they primarily look at two factors: your income and your debts. They want to ensure that you can comfortably repay the loan without stretching your finances too thin. In Canada, lenders typically use a few key calculations to assess your financial situation:

1. Gross debt service (GDS) ratio

The GDS ratio measures how much of your gross (before-tax) income will go toward housing costs. Generally, lenders prefer that your GDS ratio does not exceed 32%. This includes:

  • Your mortgage payment (principal and interest)
  • Property taxes
  • Heating costs
  • 50% of any condo fees (if applicable)

For example, if you earn $80,000 a year, your monthly gross income is approximately $6,667. To keep your GDS within the recommended limits, your total monthly housing costs should ideally be no more than $2,133.

2. Total debt service (TDS) ratio

The TDS ratio takes a broader look at your overall financial obligations, including your housing costs and other debt payments, like car loans or credit card debts. Lenders typically prefer a TDS ratio of no more than 40%. This means that all your monthly debt payments should not exceed 40% of your gross monthly income.

Continuing with the previous example, if your monthly debts (including housing costs) amount to $2,500, you’re right at the edge of the acceptable TDS ratio. With a total monthly income of approximately $6,667, this would mean your total debt payments are about 37.5% of your gross monthly income. You'll want to be cautious about taking on any additional debts to stay within the recommended limits.

What does this mean for your income?

While the specific income needed for a mortgage can vary depending on the price of the home you want and your existing debts, let’s look at a basic scenario to explain this.

Example scenario:

Let’s say you’re looking to buy a home for $900,000. If you’re making a 20% down payment (which is $180,000), you’ll be borrowing $720,000. Assuming a mortgage interest rate of about 4% over 25 years, your monthly mortgage payment would be roughly $3,790.

To meet the GDS ratio requirement, your gross monthly income should be at least $11,250. This translates to an annual income of about $135,000. However, don’t forget to include other costs like property taxes and heating, which might add an additional $400-$600 to your monthly expenses.

Some other factors to consider

While GDS and TDS ratios play a crucial role in determining your mortgage and homebuying experience, it’s important to also evaluate the following factors:

Credit score: A good credit score can also help you qualify for better mortgage rates, which could reduce your monthly payments.

Employment stability: Lenders prefer applicants with steady jobs. A consistent work history can make your application more appealing.

Down payment: The more you can contribute to a down payment, the less you’ll need to borrow, which can help to lower your GDS and TDS ratios.

While there’s no one-size-fits-all answer to how much income you need to secure a mortgage in Canada, understanding the GDS and TDS ratios can give you a solid starting point. As a first-time homebuyer, consider speaking with a mortgage professional – like one of us at Homewise – who can guide you through the process and help you determine what’s best for your situation. With the right information and preparation, you’ll be well on your way to reaching your homeownership goals.

If you have any questions or want to begin your pre-approval process, contact us today!