Definition
Borrowing capacity is the maximum mortgage amount a lender will grant a borrower, calculated according to two simultaneous constraints: debt ratios (GDS and TDS) and the stress test.
Simplified formula: - Gross annual income × 32% (max GDS) ÷ 12 = maximum monthly mortgage payment - This payment corresponds to a given mortgage principal at the qualifying rate
The down payment is a multiplying factor: a 5% down payment allows purchasing a property where price = mortgage amount ÷ 0.95. A 20% down payment = mortgage amount ÷ 0.80.
Variables that increase capacity: high income, few existing debts, large down payment, good credit file (better rate). Variables that reduce it: significant debts (auto, credit, alimony), variable or contract income, existing rental properties (specific net income calculation).
A mortgage broker calculates capacity taking all these factors into account for all lenders in the market.