Guide to Borrowing Capacity: Maximize Your Real Estate Purchasing Power

Homeownership remains one of the most significant financial milestones in one’s life. In 2025, understanding precisely what lenders are willing to offer you is not only a necessity but also a winning strategy. This amount is known as your mortgage borrowing capacity. To bring your real estate project to life and ensure long-term financial stability, one of the first steps is to determine this capacity. It helps set your potential budget for purchasing your future home, making mortgage accessibility much clearer.

While researching and using online mortgage calculators is a good starting point, navigating the complex mortgage rules is far easier with the help of a mortgage broker. Your broker is the expert who will guide you through the nuances of debt ratios, CMHC rules, and the mortgage stress test.

Key takeaway: Your borrowing capacity is the maximum amount a lender will allow you to borrow for a mortgage loan. Determining it is a crucial first step in setting your potential budget for a property purchase. This calculation depends on key variables, including your gross income, existing debts, down payment, compliance with debt-to-income ratios (GDS/TDS), and the mandatory stress test. To get an accurate estimate, navigate regulatory requirements, and adapt to different lenders’ criteria—all while maximizing your purchasing power and maintaining financial stability—the support of a mortgage broker is essential.

What Is Mortgage Borrowing Capacity?

Borrowing capacity refers to the maximum amount you can obtain as a mortgage loan. This calculation is a crucial step in the mortgage approval process, as it determines whether you can afford your mortgage payments.

Your borrowing capacity mainly depends on several factors that lenders carefully evaluate:

1. Your gross annual income:
   This is the primary factor. Gross income may include your salary, rental income, family allowances, pension income, or long-term disability insurance benefits. For self-employed individuals or those earning bonuses, the calculation can be more complex and usually requires averaging two years of income—using the lower figure if earnings are declining.
2. Your existing debts and financial commitments:
   All monthly payments on loans and lines of credit—including credit cards, car loans, student loans, and leases—are considered.
3. Your down payment: The higher your down payment, the less you need to borrow, which directly influences your borrowing capacity.
4. Your projected housing costs: These include the mortgage payment (principal and interest), property taxes, heating costs, and condominium fees if applicable.

Knowing your borrowing capacity helps you target the right properties and avoid excessive debt, ensuring long-term financial security.

The Crucial Step of the Down Payment

Your down payment is the upfront amount you pay when obtaining your mortgage. It is deducted from the property’s purchase price.

A mortgage broker can help you determine the optimal down payment strategy since the minimum required amount depends on the property’s price.

Minimum Down Payment Requirements in Canada

Minimum down payment requirements, which must be planned before assessing your borrowing capacity, are as follows:

• Property priced at $500,000 or less: Minimum 5% of the purchase price.
• Property priced between $500,000 and $1,000,000: Minimum 5% for the first $500,000 plus 10% of the portion above that amount.
• Property priced at $1,000,000 or more: Minimum 20% of the purchase price.

If your down payment is less than 20%, your mortgage is considered a high-ratio loan, and lenders will require mortgage insurance.

Mortgage Insurance

This insurance is mandatory when the down payment is below 20%. It protects the lender in case the borrower defaults on the loan. The leading insurers in Canada are:

• Canada Mortgage and Housing Corporation (CMHC)
• Sagen (formerly Genworth)
• Canada Guaranty

The insurance premium is usually added to the total mortgage amount and amortized over the life of the loan. It typically costs between 2.8% and 4% of the total mortgage amount.

Note: Historically, CMHC required that the down payment come from the borrower’s own savings, not from another loan. While Sagen and Canada Guaranty have allowed borrowed down payments (if included in the TDS calculation), working with a mortgage broker is vital to understanding how your down payment source affects your eligibility. A broker can also help you explore options such as the Home Buyers’ Plan (HBP).

GDS and TDS Ratios

Lenders assess your repayment capacity using two financial ratios based on your annual gross income:

1. Gross Debt Service (GDS) Ratio
2. Total Debt Service (TDS) Ratio

These ratios are fundamental in evaluating your mortgage borrowing capacity.

1- Gross Debt Service (GDS) Ratio

The GDS ratio determines what percentage of your gross annual income goes toward housing costs.

Included housing expenses:

• Mortgage payment (principal + interest)
• Property taxes
• Heating costs
• 50% of condo fees (if applicable)

Formula:
GDS = (Mortgage Payments + Property Taxes + Heating Costs + 50% of Condo Fees) / Gross Annual Income

The industry standard for prime lenders is a GDS of 32%, while CMHC allows up to 39%.

2- Total Debt Service (TDS) Ratio

The TDS ratio provides a more comprehensive measure, as it includes all other debts and financial obligations in addition to housing costs.

Included debts:

• All GDS components
• Debt payments (credit cards, car loans, student loans, etc.)
• Other financial obligations (spousal/child support, lines of credit, etc.)

Formula:
TDS = (Housing Expenses + All Other Monthly Debts) / Gross Annual Income

The industry standard for prime lenders is a TDS of 40%, but CMHC allows up to 44%.

Your mortgage broker ensures your ratios are calculated accurately, as they determine your maximum mortgage amount. Some lenders (like RBC, TD, and Scotiabank) may apply stricter limits than CMHC—typically GDS ≤ 32% and TDS ≤ 40%.

Summary Table: CMHC Debt Ratio Limits for Insured Mortgages

To summarize, the following table presents CMHC’s maximum allowable ratios, which typically apply to insured mortgages (i.e., down payments under 20%) and for homes priced below $1 million:

The Mortgage Stress Test in 2025

In addition to meeting the GDS and TDS ratios based on your actual contract rate, Canada requires borrowers to qualify using a higher interest rate known as the mortgage stress test rate.

The stress test is designed to ensure that you would still be able to make your mortgage payments if interest rates were to rise.

As of 2025, the rule established by the Office of the Superintendent of Financial Institutions (OSFI) for uninsured mortgages and by CMHC for insured mortgages requires that borrowers qualify at the higher of the following two rates:

• 5.25% (minimum qualifying rate), or
• Your contracted mortgage rate plus 2%.

This minimum qualifying rate generally does not apply to renewals if you remain with your current lender.

Your mortgage broker is an invaluable ally in navigating these complex regulations. They will help you calculate the real impact of the stress test on your monthly payments—and consequently, on your maximum borrowing capacity.

Don’t Forget the Closing Costs

A realistic estimate of your borrowing capacity must include all related expenses. Beyond your down payment and mortgage insurance (if applicable), you must also plan for closing costs.

These costs represent all fees required to complete the purchase transaction. Often underestimated by buyers, they must be paid in cash upon closing.

Closing costs typically range from 1% to 4% of the purchase price and usually include:

• Legal fees (lawyer or notary)
• Land transfer tax (also known as the “welcome tax”), which varies by province and municipality
• Home inspection and/or property location certificate
• Title insurance
• Adjustments for property taxes and utility services

How to Increase Your Borrowing Capacity

If your initial calculations show that your borrowing capacity is lower than expected, there are several strategies you can use to improve your financial profile in the eyes of lenders. Your mortgage broker can help identify the best combination of approaches based on your situation.

Here are some practical ways to boost your home-buying power:

• Pay down your debts: Reduce balances on credit cards, lines of credit, and personal loans. Lower total debt improves your TDS ratio, directly increasing the maximum amount you can borrow. Having too many open credit accounts—or balances exceeding 35% of your limit—can also negatively impact your file.
• Increase your down payment: A larger down payment (ideally 20% or more) reduces the amount you need to borrow and can help you avoid CMHC insurance premiums, lowering both your monthly and total costs.
• Improve your credit score: A minimum score of 680 is generally required for standard loans, and the best rates are often reserved for borrowers with a score of 720 or higher. If your credit score is low, improving it can help you qualify for better terms.
• Consider a joint mortgage: Combining your income with that of a spouse or co-borrower can make it easier to meet debt service ratio requirements, thereby increasing your eligible mortgage amount.
• Extend your amortization period: Choosing a more extended amortization period (up to 30 years if your down payment is at least 20%, or if you’re a first-time buyer purchasing a new build with CMHC insurance) lowers your monthly payments, allowing you to qualify for a higher loan. However, this also increases total interest costs.
• Compare mortgage rates: A lower interest rate means smaller monthly payments, allowing you to qualify for a larger loan with the same income. Shopping around is key to finding the best rate and terms.